Kanga & Palkhivala: The Law and Practice of Income Tax 11th ed / Kanga & Palkhivala: The Law

and Practice of Income Tax, 11th ed / S. 9. Income deemed to accrue or arise in Indi

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THE INCOME-TAX ACT, 1961

CHAPTER II Basis of Charge
S. 9. Income deemed to accrue or arise in India

(1) The following incomes shall be deemed to accrue or arise in India—

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through
or from any property in India, or through or from any asset or source of income in India,84. [* * *] or through the transfer
of a capital asset situate in India.
85. [Explanation 1].—For the purposes of this clause—

(a) 86. [in

the case of a business, other than the business having business connection in India on account of significant
economic presence,] of which all the operations are not carried out in India, the income of the business deemed
under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the
operations carried out in India;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from
operations which are confined to the purchase of goods in India for the purpose of export;
87. [* * *]

88. [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing
newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from
activities which are confined to the collection of news and views in India for transmission out of India;]
89. [(d) in the case of a non-resident, being—
(1) an individual who is not a citizen of India; or
(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or
(3) a company which does not have any shareholder who is a citizen of India or who is resident in India;
90. [(e) in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to
accrue or arise in India to it through or from the activities which are confined to the display of uncut and unassorted
diamond in any special zone notified by the Central Government in the Official Gazette in this behalf,]
no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations
which are confined to the shooting of any cinematograph film in India.]
91. [Explanation 2.—For the removal of doubts, it is hereby declared that "business connection" shall include any business
activity carried out through a person who, acting on behalf of the non-resident,—

92. [(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually
concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and
the contracts are—
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-
resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident; or]
(b) 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
(c) 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:
Provided that such business connection shall not include any business activity carried out through a broker, general
commission agent or any other agent having an independent status, if such broker, general commission agent or any
other agent having an independent status is acting in the ordinary course of his business:
Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf
of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident
and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal

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non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a
broker, general commission agent or an agent of an independent status.
93. [Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-
resident in India shall constitute "business connection" in India and "significant economic presence" for this purpose, shall
mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India
including provision of download of data or software in India, if the aggregate of payments arising from such
transaction or transactions during the previous year exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in
India, as may be prescribed:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or
clause (b) shall be deemed to accrue or arise in India.]
Explanation 3.—Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause
(c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to
accrue or arise in India.]
94. [Explanation 3A.––For the removal of doubts, it is hereby declared that the income attributable to the operations
carried out in India, as referred to in Explanation 1, shall include income from—

(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement
through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located
in India; and
(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet
protocol address located in India.]
95. [Provided that the provisions contained in this Explanation shall also apply to the income attributable to the
transactions or activities referred to in Explanation 2A.]
96. [Explanation 4.—Forthe removal of doubts, it is hereby clarified that the expression "through" shall mean and include
and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of".
Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or
interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be
deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from
the assets located in India:]
1. [Providedthat nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-
resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the
Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012, but before the
1st day of April, 2015:]
2. [Provided furtherthat nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a
non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the
Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014,3.[prior to their repeal] made under
the Securities and Exchange Board of India Act, 1992 (15 of 1992).]
4. [Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a
non-resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and
Exchange Board of India (Foreign Portfolio Investors) Regulations, 20195., made under the Securities and Exchange Board
of India Act, 1992 (15 of 1992).]
6. [Explanation 6.—For the purposes of this clause, it is hereby declared that—

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(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets
(whether tangible or intangible) located in India, if, on the specified date, the value of such assets—
(i) exceeds the amount of ten crore rupees; and
(ii) represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may
be;

(b) the fair market value of an asset shall be the value as on the specified date, of such asset without reduction of
liabilities, if any, in respect of the asset, determined in such manner as may be prescribed;
(c) "accounting period" means each period of twelve months ending with the 31st day of March:
Provided that where a company or an entity, referred to in Explanation 5, regularly adopts a period of twelve months
ending on a day other than the 31st day of March for the purpose of—

(i) complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or
(ii) reporting to persons holding the share or interest,
then, the period of twelve months ending with the other day shall be the accounting period of the company or, as
the case may be, the entity:
Provided further that the first accounting period of the company or, as the case may be, the entity shall begin from
the date of its registration or incorporation and end with the 31st day of March or such other day, as the case may
be, following the date of such registration or incorporation, and the later accounting period shall be the successive
periods of twelve months:
Provided also that if the company or the entity ceases to exist before the end of accounting period, as aforesaid,
then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to
exist.

(d) "specified date" means the—

(i) date on which the accounting period of the company or, as the case may be, the entity ends preceding the date
of transfer of a share or an interest; or
(ii) date of transfer, if the book value of the assets of the company or, as the case may be, the entity on the date of
transfer exceeds the book value of the assets as on the date referred to in sub-clause (i), by fifteen per cent;
Explanation 7.—For the purposes of this clause,—

(a) no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or
interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5,—
(i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or
along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither
holds the right of management or control in relation to such company or entity, nor holds voting power or share
capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the
case may be, of such company or entity; or
(ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or
along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither
holds the right of management or control in relation to such company or entity, nor holds any right in, or in
relation to, such company or entity which would entitle him to the right of management or control in the
company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or
share capital or interest in such company or entity which results in holding of (either individually or along with
associated enterprises) a voting power or share capital or interest exceeding five per cent of the total voting
power or total share capital or total interest, as the case may be, of the company or entity that directly owns the
assets situated in India;
(b) in a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to
in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India
of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only
such part of the income as is reasonably attributable to assets located in India and determined in such manner as
may be prescribed;
(c) "associated enterprise" shall have the meaning assigned to it in section 92A;]

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(ii) income which falls under the head "Salaries", if it is earned in India.7. [Explanation.—For the removal of doubts, it is hereby
declared that the income of the nature referred to in this clause payable for—
(a) service rendered in India; and
(b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the
service contract of employment,
shall be regarded as income earned in India;]

(iii) income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India;
(iv) a dividend paid by an Indian company outside India;
8. (v) income by way of interest payable by—
(a) the Government; or
(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed
and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of
making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed
and used, for the purposes of a business or profession carried on by such person in India;
9. [Explanation.—For the purposes of this clause,—

(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any
interest payable by the permanent establishment in India of such non-resident to the head office or any permanent
establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and
shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the
permanent establishment in India shall be deemed to be a person separate and independent of the non-resident
person of which it is a permanent establishment and the provisions of the Act relating to computation of total
income, determination of tax and collection and recovery shall apply accordingly;
(b) "permanent establishment" shall have the meaning assigned to it in clause (iiia) of section 92F.]
10. (vi) income by way of royalty payable by—
(a) the Government; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used
or services utilised for the purposes of a business or profession carried on by such person outside India or for the
purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or
services utilised for the purposes of a business or profession carried on by such person in India or for the purposes
of making or earning any income from any source in India:
Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as
consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in
respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret
formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made
before the 1st day of April, 1976, and the agreement is approved by the Central Government:
11. [Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of
royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights
(including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along
with a computer or computer-based equipment under any scheme approved under the Policy on Computer
Software Export, Software Development and Training, 1986, of the Government of India.]
Explanation 1.—For the purposes of the12. [first proviso], an agreement made on or after the 1st day of April, 1976,
shall be deemed to have been made before that date if the agreement is made in accordance with proposals
approved by the Central Government before that date; so, however, that, where the recipient of the income by way
of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless,
before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed
originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day
of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this
Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to
the13.[Assessing Officer] (such option being final for that assessment year and for every subsequent assessment
year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.

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Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum
consideration but excluding any consideration which would be the income of the recipient chargeable under the
head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model,
design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design,
secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience
or skill;
14. [(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts
referred to in section 44BB;]
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or
scientific work including films or video tapes for use in connection with television or tapes for use in connection
with radio broadcasting15.[* * * * *]; or
(vi) the rendering of any services in connection with the activities referred to in16.[sub-clauses (i) to (iv), (iva) and
(v)].
17. [Explanation
3.—For the purposes of this clause, "computer software" means any computer programme
recorded on any disc, tape, perforated media or other information storage device and includes any such
programme or any customized electronic data.]
18. [Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in
respect of any right, property or information includes and has always included transfer of all or any right for use
or right to use a computer software (including granting of a licence) irrespective of the medium through which
such right is transferred.
Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always
included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
Explanation 6.—For the removal of doubts, it is hereby clarified that the expression "process" includes and shall
be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for
down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is
secret;]

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19. [(vii) income by way of fees for technical services payable by—
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or
profession carried on by such person outside India or for the purposes of making or earning any income from any
source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or
profession carried on by such person in India, or for the purposes of making or earning any income from any
source in India:
20. [Providedthat nothing contained in this clause shall apply in relation to any income by way of fees for technical
services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central
Government.]
21. [Explanation1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April,
1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals
approved by the Central Government before that date.]
22. [Explanation
2].—For the purposes of this clause, "fees for technical services" means any consideration (including
any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the
provision of services of technical or other personnel) but does not include consideration for any construction,
assembly, mining, or like project undertaken by the recipient or consideration which would be income of the recipient
chargeable under the head "Salaries".]

23. [(viii) income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid
on or after the 5th day of July, 2019, by a person resident in India to a non-resident, not being a company, or to a
foreign company.]

(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently
outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 31424.
of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the
Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the
commencement of the Constitution as a Judge in India.
25. [Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-
resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be
included in the total income of the non-resident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India].

1. Section 9: Income Deemed to Accrue in India—Section Applies to Both Residents and Non-residents.—
This section gathers in one place various provisions (which stood scattered in the 1922 Act) under which income actually accruing
to an assessee abroad is deemed to accrue in India. The income accrues, in fact, to the assessees and the fictions embodied in this
section operate only to shift the locale of accrual of the income.
This section applies to both residents and non-residents:26. to Indian nationals as well as foreigners.27.
Under s 5, all residents and non-residents are alike chargeable in respect of income which accrues or is deemed to accrue in India
or is received in India. Non-residents who are not assessable in respect of income accruing and received abroad are rendered
chargeable under s 5(2)(b) in respect of income deemed by this section to accrue in India. Likewise, persons who are resident but
not ordinarily resident would be assessable under s 5(1)(b) in respect of income covered by this section, whereas but for this
section the income might have been exempt under the proviso to s 5(1)(c). As regards assessees who are resident and ordinarily
resident, this section has no effect, since such assessees are taxable under s 5(1) in respect of income accruing in any part of the
world.

2. Double Taxation Avoidance Agreements.—

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When non-residents earn income from sources in India, and such sources are taxed under s 9, they usually become liable to tax in
both India and their country of residence, since most countries tax their residents on their global income. This leads to what is
known as 'juridical double taxation'. To avoid this, countries enter into Double Taxation Avoidance Agreements (DTAAs), which
restrict the source country's right to tax certain kinds of income, and often allow the taxpayer credit for taxes paid abroad in his
country of residence. DTAAs create peculiar difficulties in interpretation and implementation, because, unlike many other
international conventions, they directly apply to private persons and they are applied and administered domestically.
Section 9 deals with incomes deemed to accrue or arise in India to non-residents, and the provisions of this section have to be
read along with DTAAs entered into by India with various countries (s 90) or regions (s 90A). Since s 90 states that when the
treaty is more beneficial, the assessee can take umbrage under it, if the assessee can show that under either the Act or the treaty,
such income is not taxable in India, it will not be taxed in India in respect of such income. If the Act exempts such income from
taxation, then, irrespective of the treaty, such income is not taxable in India. On the other hand, if the treaty states that only the
other country can impose tax on that income, it will be more beneficial to the assessee, and under s 90, the income cannot then
be taxed under the provisions of this Act.
A typical tax treaty follows either the Model Convention drafted by the Organisation for Economic Co-operation and
Development (OECD)28. or the United Nations (UN).29. The Model Conventions standardise language and wording, and aid
uniform interpretation and practices.
Most countries use these Model Conventions and the Commentaries that are prepared by experts in these organisations to enter
into, understand and interpret these treaties. Such commentaries reflect contemporanea expositio, and that although they are
not binding on the courts, they have persuasive value. The Supreme Court has emphasised that well-settled internationally
accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed by the
Courts in India when it comes to construing similar terms occurring in the Act.30. The Delhi High Court has held that when
technical terms used in the DTAA are the same which appear in s 9(1)(vi), for better understanding of these terms, the OECD
commentary can always be relied upon.31. When the language in the treaties closely mirror the OECD or the UN Model, it can be
presumed that the States entered into these agreements with the same connotation, keeping the interpretation in the
commentaries in mind.
The Model Conventions reflect international practices and a uniform understanding of the law. They form the basic template for
hundreds of DTAAs. Often, the Commentaries are the only material that explain the expressions used in a treaty. Importantly, the
Commentaries give a degree of certainty to the non-resident taxpayer regarding the law in a particular jurisdiction.32. Therefore,
unless a different intention can be clearly shown, either from the preparatory material to the particular treaty in question, the
circumstances surrounding the treaty, or a consistent contrary view taken by the States,33. it is submitted that the view in the
Commentary is not to be lightly discarded. The Supreme Court refused to look into the OECD commentary and foreign
judgments in the case of CIT v PVAL Kulandagan Chettiar.34. This case cannot be used as an authority for the proposition that
OECD Commentaries need not be relied upon, since in the facts of this case, the language of the treaty and the language of the
Model Convention were vastly different.35.
Where the understanding of the law by individual countries differs from the organisation's view, they express their reservations to
certain portions of the Commentaries. Since such reservations in India are expressed by the revenue department, and not by
Parliament, it is submitted that they are not binding on the Courts in interpreting the treaty or domestic law.
In the context of the DTAA with the United States, it was held that payments made for repair of hardware would come within the
category of business profits and were not taxable because the US company did not have a permanent establishment in India. On
the other hand, payments made for repair of software would be fees for included services and taxable in terms of the DTAA.36.

3. Permanent Establishment.—
Under most DTAAs, Article 7 states that business income is taxed in the country of residence, unless the enterprise has a
permanent establishment in the country of source, and such income can be attributed to the permanent establishment. Article
5(1) of the Model Convention defines a permanent establishment as a "fixed place of business" through which "the business of
the enterprise" is wholly or partly carried on. Article 5(2) states that certain facilities such as a branch, a place of management, an
office, a factory, a workshop and a mine.
To constitute a PE under the basic rule, there must be a place of business that is fixed, at the disposal of the enterprise and the
business of the enterprise must be carried out wholly or partly through this place. The question of whether an activity constitutes
a business or not is a mixed question of fact and law, and depends on the facts and circumstances of the case. 37. Applying this
test, the AAR has held that a venture capital fund,38. a project office,39. a company that engages skilled labour to supply them to
other companies in India,40. are all engaged in "business". The OECD Commentary observes that a "place of business" must be
tangible and cannot include an internet website. On the other hand, the AAR has held that a moving vessel,41. a residential
premise,42. or warehouse facilities,43. can all be considered as places of business. The Andhra High Court held that the mere
presence of a supervisor at the assembly site does not constitute a PE.44.
The Model Convention, and consequently, many treaties also contemplate other kinds of permanent establishments. Building and

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construction sites, or assembly or installation projects, that last more than a specified period of time, usually twelve months, are
often considered to be permanent establishments under Article 5(3). A dependant agent who habitually exercises an authority to
conclude contracts on behalf of the principal is also considered to be a permanent establishment under Articles 5(5) and 5(6).
Under Article 5(3)(b) of the UN Model Convention, a person who furnishes services to another in that State through the presence
of personnel for a period of more than six months is considered to be a "service PE". This provision is absent in the OECD Model,
but is present in many of India's DTAAs. It has been held by the AAR that when an Indian subsidiary performs services for its
foreign parent, it constitutes a "service PE".45. This decision, it is submitted, is incorrect since Article 5(8) clearly states that a
subsidiary shall not ordinarily constitute a permanent establishment.
In the Act, s 92F(iiia) defines a "permanent establishment" in the same terms as Article 5(1) of the Model Convention, but uses
the term "includes" instead of "means". Therefore, the definition under the Model Convention is exhaustive, and the definition
under the Act is only inclusive. The term "business connection" under s 9 of the Act is comparable to a "permanent
establishment". While the Supreme Court has held that the two terms do not have the same meaning, the reasoning of the
judgment is not clear.46. A plain-reading of the requirements of the treaties and judicial development of the understanding of the
term "business connection" suggests that the latter term is wider than the former. The AAR has held that a "business connection"
may exist independent of a PE,47. and a circular of the Revenue suggests that the reverse is not possible.48.

4. Section does not apply where income actually accrues or is received in India.—
This section which deems certain categories of income to accrue in India has no application in cases where income actually accrues
in India49. for a fiction is not needed to create a situation which exists in reality. 50. Likewise, it does not apply in cases where
income is received in India. The reason is that in respect of income which is received in India, residents and non-residents are alike
chargeable under s 5 irrespective of the place of accrual of the income; therefore, if an assessee receives income in India, that
would be sufficient to attract tax, and the further questions whether the income should be deemed to accrue in India by virtue of
this section would not arise for consideration.51.
It was held that agency commission payable to a non-resident rendering agency services in his country to an Indian client accrues
or arises in India, and the question of going to the provisions of s 9 does not arise.52. The answer to where the income from
commission arises might lie in private international law. The time of accrual of an income is when the assessee has the right to
receive it. Hence, the place of accrual of income is where the right to receive is located. This question can only be decided by
determining the proper law of the contract under which the debt is created. If not specified in the contract or discernible by
implication, the proper law of the contract would be that country which has the closest connection to the contract.53.
If the income is not received in India, a non-resident would not be chargeable upon it unless it accrues or is deemed to accrue in
India. Thus, a general charge of income-tax is imposed by ss 4 and 5, and the general charge is given a particular application in
respect of non-residents by this section which enlarges the ambit of taxation by deeming income to arise in India in certain
circumstances.54.
Clauses (v), (vi) and (vii) were inserted in 1976 primarily to get over a decision of the Supreme Court.55. The scope of these clauses
are dealt with later in this section – see topic titled "Sub-section (1), Clauses (v), (vi) and (vii): Interest, Royalty and Technical Fees",
infra.

5. Sub-section (1), Clause (i) [Section 42(1) of 1922 Act]: Scope.—

Under this clause, which reproduces a part of s 42(1) of the 1922 Act, income is deemed to accrue in India if it accrues, directly or
indirectly:

(i) through or from any business connection in India;

(ii) through or from any property in India;
(iii) through or from any asset or source of income in India;
(iv) through or from any money lent at interest and brought into India in cash; in kind (deleted with effect from June 1, 1976); or
(v) through the transfer of a capital asset situated in India.
There is nothing in this clause to exclude from its scope any of the heads of income mentioned in s 14 of the Act.56. It is
important to note that the expression "through or from" is absent only in category (v) above. The absence is significant and the
absence of the phrase "or from" in category (v) means that the deeming provision will apply only to income accruing or arising
directly or indirectly "through" the transfer of a capital asset. The deeming provision will not apply to income arising or accruing
from the transfer of a capital asset outside India.
Explanation 4 to s 9(1)(i), inserted by Finance Act, 2012 with retrospective effect from April 1, 1962, clarifies that the term
"through" means "by means of" or "in consequence of" or "by reason of".

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Rule 10 (r 33 under the 1922 Act) provides the method of computation of income to be followed in cases where the income
deemed to accrue in India under this clause cannot be exactly ascertained.57.
Intra Vires.—
The general conception as to the scope of income-tax is that, given a sufficient territorial connection or nexus between the person
sought to be charged and the country seeking to tax him, income-tax may properly extend to that person in respect of his
foreign income.58. The provisions of this clause which impose liability on the basis of the different varieties of nexus set out above
are based on a sufficient and real territorial connection. The corresponding provisions in the 1922 Act were held to be valid and
intra vires.59. In Abdul Azeez v CIT,60. the Madras High Court held the provisions imposing tax liability on the non-resident, and
vicarious liability on agent, in respect of income arising from a business connection in India, did not offend arts 14 and 19(1)(g) of
the Constitution. [See further s 1, under 'Territorial Connection, and Extra-territorial Operation of the Act'.]

6. Clause (i): Its two functions.—

This clause performs two functions:

(i) It deems the above four categories of income to accrue in India. The deeming provisions of this clause:
(a) apply to residents and non-residents alike; and
(b) have no application where income actually accrues in India or is received in India. Both these points have been noted
above in dealing with this section generally.
(ii) It specifies the categories of income in respect of which a vicarious liability is imposed by ss 160 and 161 on an agent to be
assessed in respect of a non-resident's income. In performing this function, the clause:
(a) applies to the income of non-residents alone; and
(b) specifies the categories of income in respect of which the agent is vicariously liable even if the income actually accrues in
India or is received in India.
[See under ss 160(1)(i), 161, 162 and 163.]

7. 'Business Connection'.—
The expression 'business connection' was earlier not defined in the Act. The Finance Act 2003 had, with effect from the
assessment year 2004–05, inserted two new explanations to cl (i) of this sub-section, clarifying that the expression 'business
connection' will include a person acting on behalf of the non-resident, who:

(i) 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; [old cl (a) of Explanation 2 – for
substituted cl (a) by the Finance Act, 2018 see infra]
(ii) 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
(iii) 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.61.
Clause (a) of Explanation 2 has been substituted by the Finance Act, 2018, with effect from April 1, 2019 and the substituted cl (a)
expands the scope of "business connection". This clause is based on BEPS Action Plan 7.62. Clause (a) will now include a person
acting on behalf of the non-resident, who has and habitually exercises in India, an authority to conclude contracts on behalf of the
non-resident or habitually concludes contracts; or habitually plays the principal role leading to conclusion of contracts entered by
that non-resident. These contracts should be in the name of the non-resident, or should be for transfer of the ownership of, or
for granting the right to use property owned by the non-resident or the non-resident having right to use, or contract for
provision of services by the non-resident.
A liaison office only to receive trade enquiries and transmit them to the main office at Dubai, it did not amount to having a
"business connection" in India. However, if its activities were expanded and the liaison office could enter into negotiations for
import/purchase of goods by the Indian customers, it would come within the expression "business connection".63. A liaison office,
assisting Indian manufacturers to manufacture goods according to their specifications for the purpose of export, will not
constitute a business connection in India.64.

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If an Indian subsidiary has negotiated and entered into contracts with another Indian company, in the absence of any material
showing that the Indian subsidiary habitually exercised any authority on behalf of a non-resident holding company to conclude
contracts, the non-resident will have no business connection in India.65.
The well-established legal distinction between an 'agent' and an 'independent contractor' must be kept in mind66. before one can
conclude that a business connection exists by virtue of application of the Explanation.67. It has also been explained that where a
business is carried on in India through a person referred to in cll (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.

8. Significant Economic Presence.—

Explanation 2A has been introduced by the Finance Act, 2018, with effect from April 1, 2019 under which the "significant
economic presence" of a non-resident in India shall constitute "business connection". These provisions were omitted from
assessment year 2021-22 and substituted to come into effect from assessment year 2022-23, as discussion on this issue is still
under process in G-20-OECD BEPS Project. This Explanation is based on BEPS Action Plan 1, which necessitated measures to
tackle challenges posed by the digital economy. India had also introduced Equalisation Levy, based on BEPS Action Plan 1, under
Chapter VIII of the Finance Act, 2016, but this levy is not part of the Income-tax Act.
What constitutes significant economic presence is defined in Explanation 2A, and means:

(a) Any transaction in respect of any goods, services or property carried out by a non-resident with any person in India, including
provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions
during the previous year exceeds such amount as may be prescribed; or
(b) Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be
prescribed, in India through digital means. The words 'in India through digital means' formed part of the old Explanation
2A.
Clause (a) to the Explanation does not suggest that the transactions should be through 'digital means' although the intention of
inserting the Explanation 2A was to include digital transactions within the scope of "business connection". This seems to be a case
of faulty drafting. By the Finance Act, 2020, wherein Explanation 2A is substituted, the words 'in India through digital means' in
cl (b) are deleted. This omission makes the Explanation 2A even more evasive, as to whether it will apply only to digital
transactions. It is hoped that the CBDT clarifies that Explanation 2A applies only to digital transactions. It is submitted that
traditional business transactions should be covered by Explanation 2 and digital transactions by Explanation 2A. It is important to
note that while the definition of "business connection" in Explanation 2 is inclusive, that of "significant economic presence" in
Explanation 2A is exhaustive.
The proviso to the Explanation further clarifies that the transactions or activities shall constitute significant economic presence in
India, irrespective of the fact whether the agreement for such transactions or activities is entered in India; or the non-resident has
a residence or place of business in India; or services are rendered in India. The third limb of the first proviso clarifies that
Explanation 2A will apply irrespective of whether the services are rendered in India.
The second proviso restricts the scope of taxation in India only to the extent of income that is attributable to activities referred to
in cll (a) and (b). It is submitted that Explanation 2A is to be interpreted purposively, and its application should be restricted to
income deemed to accrue or arise in India by virtue of digital transactions of the non-resident who has a significant economic
presence in India.
Since no threshold limits have been prescribed, for all practical purposes, these provisions remain inoperative. By the Finance Act,
2020, implementation of Explanation 2A has been deferred to assessment year 2022-23.

9. Equalisation Levy.—
Equalisation Levy (EL) was introduced by Finance Act, 2016 [ss 163 to 180 of Chapter VIII to the Finance Act, 2016]. However, it
has not been made as part of the provisions of the Income-tax Act, 1961. This has been introduced in pursuance to the
recommendations of the eight member Committee appointed by the CBDT on Taxation of e-commerce, which evaluated the BEPS
Action Plan 1.68. BEPS Action Plan 1, although suggested 'Equalisation Levy' as one of the measures to tackle taxation of digital
commerce, cautioned that selection of any of the suggested measures, including equalisation levy, should not violate any treaty
obligations.
Charge of Equalisation Levy.—
Section 165(1) of the Finance Act, 2016, provides for EL at the rate of 6 per cent. on the consideration for "specified services"
received or receivable from a person resident in India or a non-resident having a PE in India, and carrying on business or
profession. Exception to the levy is provided in s 165(2). "Specified service" is defined in s 164(i) to mean online advertisements,
any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any

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other service as may be notified by the Central Government.

By the Finance Act, 2020, e-commerce supply of services will also be liable to EL. From April 1, 2020, every e-commerce operator,
being a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online
provision of service or both, will have to pay 2 per cent. of consideration received or receivable on supply of such goods or
services as EL. Such supply or service should be made by the non-resident e-commerce operator to a person resident in India; or
to a non-resident under specified circumstances; or to a person who buys such goods or services using internet address located
in India. However, to attract the EL, the non-resident e-commerce operator should have a turnover of Rs. 2 crore or more from
supply or service made to such persons. Unlike the EL on specified service of online advertisement where the charge is on the
payer, under the new e-commerce operator EL, the charge is on the payee, who is a non-resident. It is submitted that the EL
directly imposed on a non-resident will have numerous practical challenges. On the one hand, Explanation 2A to s 9(1)(i),
significant economic presence, has been deferred but on the other hand India has once again unilaterally sought to levy taxation
on digital transactions by forcing such a levy and consequent statutory obligations on the non-resident directly.
However, income of a non-resident arising from any specified services chargeable to Equalisation Levy will be exempt from tax
under the Act [s 10(50)]. Therefore, if the income of a non-resident, if any, arising from significant economic presence on the basis
of Explanation 2A to s 9(1)(i) of the Act has been subjected to Equalisation Levy, it will be exempt under the Act. There is no
option provided to a non-resident assessee to elect to be taxable either under the Act based on significant economic presence or
based on Equalisation Levy. Equalisation levy will be a primary levy. If there is no charge under Equalisation Levy, the non-resident
can claim that its income is not taxable in India under the DTAA as it does not have a PE in India. However, the benefit of DTAA is
not available for Equalisation Levy, as s 178 of the Finance Act, 2016 does not refer to provisions of s 90 of the Act. This raises
doubts on the nature of tax under the EL: whether a tax on income or an indirect tax. On the one hand, non-deduction of tax
under s 165, will amount to disallowance of the entire consideration under s 40(a)(ib) of the Act and on the other hand, the tax so
paid, will not be covered under s 90 of the Act.

10. Income from Advertisement and Data.—

The Finance Act, 2020 has further expanded the scope of business connection by inserting Explanation 3A. Now the following
incomes will be included within the expression 'income attributable to the operations carried out in India':

(i) income from advertisement which target Indian customers or a customer who accesses such advertisement from an internet
address located in India;
(ii) income from sale of data collected from a person who resides in India or from a person who collects data by using an internet
address located in India; and
(iii) income from sale of goods or services using data collected from a person who resides in India or from a person who collects
data by using internet address located in India.
Explanation 3A is in addition to income that is attributable by way of significance economic presence in India under Explanation
2A. Explanation 3A will have wide ramifications as there are no threshold limits prescribed for it to be applicable. However, one will
have to wonder as to how one will track the internet addresses and its usage, when the internet world has exploded with millions
of users.

LAW UPTO ASSESSMENT YEAR 2003–04

The law before the insertion of the above explanations by the Finance Act 2003 is discussed in the following commentary, which is
retained here since parts of it will continue to remain relevant, subject to the abovementioned amendments in the law.
The expression 'business connection' has a wide though uncertain meaning: it admits of no precise definition and the solution of
the question must depend upon the particular facts of each case.69. The meaning of the expression 'business connection' in this
section is not restricted by the definition 'business' contained in s 2(13), which is enumerative and not exhaustive.70. The Privy
Council held in CIT v Currimbhoy Ebrahim & Sons Ltd.,71. that the phrase 'business connection' is different from, though
doubtlessly related to, the word 'business' of which there is a definition in s 2(13), and that income arising from a business
connection may be chargeable under a head other than 'business'; for instance, it may be interest chargeable under the head
'Income from other sources'.
SHAH J, speaking for the Supreme Court in CIT v Aggarwal & Co,72. observed:
A b u sin ess co n n ectio n ... in vo lves a relatio n b etw een a b u sin ess carried o n b y a n o n -residen t w h ich yields p ro fits o r gain s an d so me
activity in [In dia] w h ich co n trib u te directly o r in directly to th e earn in g o f th o se p ro fits o r gain s. It p redicates an elemen t o f co n tin u ity
b etw een th e b u sin ess o f th e n o n -residen t an d th e activity in [In dia]: a stray o r iso lated tran sactio n is n o rmally n o t to b e regarded as a
b u sin ess co n n ectio n s 73.… Th e exp ressio n 'b u sin ess co n n ectio n ' p o stu lates a real an d in timate relatio n b etw een tradin g activity carried o n
o u tside [In dia] an d tradin g activity w ith in [In dia], th e relatio n b etw een th e tw o co n trib u tin g to th e earn in g o f in co me b y th e n o n -residen t
in h is tradin g activity. 74.

In that case, mere canvassing (sales promotion) operations by a commission agent in India who had no authority to accept orders

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or enter into contracts on behalf of the non-resident were held not to constitute such a real and intimate relation as to amount
to a business connection.
The essential features of 'business connection' may be summed up as follows:- (i) a real and intimate relation must exist between
the trading activities by a non-resident carried on outside India and the activities within India; (ii) the relation contributes directly
or indirectly to the earning of income by the non-resident in his business; (iii) a course of dealing and continuity of relationship
and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would
furnish a strong indication of business connection.75.
The categories of 'business connection' are incapable of exhaustive enumeration. Illustrative instances of business connection are:

(i) maintaining in India a branch office for the purchase or sale of goods or transacting other business;76.
(ii) erecting here a factory where the raw produce purchased locally is worked into a form suitable for export abroad;77.
(iii) appointing an agent (who may not be the sole agent78. ) in this country for the systematic and regular purchase of raw
materials or other commodities, or for sale of the non-resident's goods, or for other business purposes;79.
(iv) forming a local subsidiary company to sell the products of the non-resident parent company;80.
(v) close financial association between a resident and a non-resident company;81. and
(vi) the grant of a continuing licence to a resident to exploit for profit an asset belonging to a non-resident, though the
transaction may be disguised as an out and out sale.82.
Thus, 'business connection' would include a branch, factory, agency, receivership or management.83. A business connection may
exist even without any regular agency, branch or other definite organisation.84. But the mere fact that a substantial part of a non-
resident's output finds its way into the Indian market or is sold directly or through brokers to various customers in India,85. or the
mere rendering of services outside India to a person carrying on business in India,86. would not amount to a business connection
in India. In case of sale of machinery abroad, the fact that the foreign supplier agrees to render certain limited services in India
which are incidental to the contract and are usually provided for—like supplying technical and personnel services, or supervising
erection of the machinery and giving guarantee for its efficient working—would not make him liable to tax on the ground of
business connection.87. Offshore supply of equipment will not result in a business connection in India.88.
Profits accruing to a non-resident in foreign countries through work done in India by his agents here whose agency territory
includes those foreign countries,89. or profits arising to a non-resident even from sales made by him directly (on principal to
principal basis) to his 'agent' in India pursuant to a clause in the sole agency agreement,90. may be deemed to accrue in India
under this section on the ground that they arise directly or indirectly from a business connection in India.
In Barendra Prasad Ray v ITO,91. a barrister from the United Kingdom came to India and argued a case which lasted a fortnight.
The Indian solicitors who did not brief him or pay him any fees but who assisted at the hearing of the case, were still held by the
Supreme Court to have a business connection with the barrister and to be therefore liable as agents under s 163(1) in respect of
the fees paid abroad by the London solicitors who had briefed the barrister. The decision is incorrect. There is no warrant for:

(i) extending the doctrine of business connection to include a professional connection,

(ii) regarding the presentation of argument in a single case as constituting a business connection,
(iii) finding a business connection to exist between the barrister and the Indian solicitors who neither briefed him nor paid him
any fees, and
(iv) holding that any income arose to the barrister from the alleged business connection with the Indian solicitors.92.
Neither on principle nor on precedent is the court's judgment supportable on any of the four points. The fact that under the
general law the word 'business' is wide enough to cover a profession is not a good reason for regarding the expression 'business
connection' as including a professional connection, particularly in a statute which has uniformly used in various places— including
the very head of income 'Profits and gains of business or profession'—the words 'business' and 'profession' as denoting distinct
and different concepts.93. The Supreme Court observed, 'There could be no good reason for Parliament for excluding non-resident
professional men from the purviews of s 9(1) of the Act. There is no material on which we can reach that conclusion.'94. It is
difficult to reconcile this observation with the well-settled canon of interpretation that the rule of strict construction applies a
fortiori to provisions which create an article or vicarious liability to tax.95. On the correct construction of this rule, the court should
have asked the opposite question—whether there was any material on which it could reach the conclusion that the Parliament
did intend non-resident professional men to fall within s 9(1).
The AAR,96. after analyzing the decisions of the Supreme Court,97. summed up the essential features of "business connection" as
follows:

(a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the
activities within India;

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(b) such relation shall contribute, directly or indirectly, to the earning of income by the non-resident in his business;
(c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-
resident outside India and the activity in India, would provide a strong indication of "business connection" in India.
The distinction drawn in English cases between trading with a country and trading in a country1. turns upon the different wording
of the English statute and has no bearing on the question of a 'business connection' within the meaning of this section.2.
Illustrations

1. Th e assessee carried o n b u sin ess as imp o rter an d as co mmissio n agen t o f n o n -residen t exp o rters. Fo r tw o o f th e n o n -residen t
exp o rters h e can vassed o rders in Amritsar fo r th e su p p ly o f w o rsted w o o llen yarn an d co mmu n icated th e same to th e n o n -residen ts
an d received co mmissio n o n th e sales made b y th em. Th e assessee h ad n o au th o rity to accep t an y o rders o n b eh alf o f th e n o n -
residen ts. Th e o rders w ere accep ted, th e p rice w as received an d th e delivery o f go o ds w as given , b y th e n o n -residen ts o u tside In dia.
O n e o f th e tw o n o n -residen ts, an Italian co n cern , h ad describ ed th e assessee in th e letter o f ap p o in tmen t as th e 'so le agen ts… fo r
sale' o f its p ro du cts in In dia; th e o th er, a Belgian co n cern , h ad ap p o in ted th e assessee as its rep resen tative fo r th e w h o le o f In dia o n
co n ditio n th at h e w o u ld n o t rep resen t an y o th er Belgian mill o r yarn p ro du cer an d w o u ld n o t sell Belgian yarn in In dia o n h is o w n
acco u n t. Held, th ere w as n o b u sin ess co n n ectio n in In dia. 3.
2. So me b ro kers in In dia u sed to , as p art o f th eir o w n b u sin ess, can vass o rders fro m p u rch asers in In dia. Th e b ro kers w ere n o t sp ecially
en gaged b y th e n o n -residen t assessee n o r did th ey can vass o rders exclu sively fo r th e assessee. Th ey w ere freelan ce b ro kers an d w ere
at lib erty to p lace th e o rders secu red b y th em w ith th e assessee o r w ith an y o th er dealer. Th e o ffers o f p u rch ase w ere sen t b y th e
b ro kers to th e assessee at Ujjain (w h ich w as o u tside British In dia) an d th ey w ere accep ted o r refu sed b y th e assessee th ere. Th e
assessee p aid co mmissio n to th e b ro kers. Th e p u rch asers p aid fo r th e go o ds to a b ro ker o r b an ker in British In dia again st an
en do rsed railw ay receip t. Held, th ere w as n o b u sin ess co n n ectio n in B ritish In dia. 4.
3. A n o n -residen t p u rch ased in th e state o f Baro da to b acco fo r a residen t o f British In dia fo r th e latter's bidi b u sin ess an d th e n o n -
residen t w as p aid b y th e residen t co mmissio n at a certain p ercen tage o f th e to tal valu e o f th e go o ds p u rch ased b y h im. Held, as th e
co mmissio n p aid to th e n o n -residen t h ad referen ce so lely to th e p u rch ases made o u tside British In dia an d w as in n o w ay affected b y
th e b u sin ess do n e in British In dia, th e co n n ectio n in British In dia. '… So meth in g mo re th an mere ren derin g services o u t o f British
In dia fo r remu n eratio n to a residen t b u sin essman is n ecessary to estab lish a b u sin ess co n n ectio n '. 5.
4. A co mp an y in co rp o rated in Ho n g Ko n g to carry o n a fin an ce b u sin ess virtu ally u sed its en tire cap ital in advan cin g lo an s fro m time to
time at in terest b u t w ith o u t secu rity to a co mp an y w ith similar o b jects in Bo mb ay. Held, th e Ho n g Ko n g co mp an y h ad a b u sin ess
co n n ectio n in In dia. 'Th e b u sin ess in terests o f th e Ho n g Ko n g co mp an y w ere p ractically en tirely w o u n d u p in th e b u sin ess w elfare o f
th e B o mb ay Co mp an y. Th e failu re o f th e latter w o u ld h ave in vo lved th e ru in o f th e fo rmer.' 6.
5. An In dian b an k an d a fo reign b an k w ere co n tro lled b y th e same p erso n s. Th e main fu n ctio n o f th e fo reign b an k w as to fin an ce th e
In dian b an k. Th e lo an s advan ced b y th e fo reign b an k to th e In dian b an k rep resen ted a large p art o f th e cap ital o f th e fo reign b an k.
Th e flo w o f b u sin ess b etw een th e tw o b an ks w as secu red b y th e co mp lete co mmo n co n tro l exercised o ver th e b u sin ess o f b o th b an ks
so th at th e lo an s co u ld b e safely made w ith o u t secu rity an d fo r in defin ite p erio ds. Th e lo an s in qu estio n w ere made o u tside In dia
th ro u gh th e fo reign b ran ch es o f th e resp ective b an ks an d w ere rep ayab le also o u tside In dia, b u t th e mo n eys w ere u sed b y th e In dian
b an k in th is co u n try. Held, a b u sin ess co n n ectio n existed in In dia b etw een th e tw o b an ks. 7.
6. An American co mp an y fo rmed a su b sidiary co mp an y in Bo mb ay fo r th e exp ress p u rp o se o f acqu irin g fro m th e American co mp an y an d
carryin g o n in B o mb ay th e American co mp an y's b u sin ess o f sellin g its p ro du cts. Alth o u gh n o co n tractu al o b ligatio n existed to co mp el
th e Bo mb ay co mp an y to p u rch ase an y o f th e man u factu res o f th e American co mp an y, th e flo w o f b u sin ess b etw een th e tw o
co mp an ies w as secu red b y th e fact th at th e u ltimate an d co mp lete co n tro l o f th e Bo mb ay co mp an y w as vested in th e American
co mp an y w h ich o w n ed all its sh ares. Held, a b u sin ess co n n ectio n existed b etw een th e American co mp an y an d th e Bo mb ay co mp an y
an d th at th e estimated p ro fit at w h ich th e American co mp an y so ld its man u factu res to th e Bo mb ay co mp an y as w ell as th e dividen ds
p aid b y th e Bo mb ay co mp an y to th e American co mp an y w ere in co me w h ich mu st b e deemed to h ave accru ed to th e American
co mp an y in In dia. 8.

11. Loans Advanced by Non-residents.—

Where moneys are lent outside India and brought into India to be employed to earn profits, it would not amount to any business
connection in India if the loan is an isolated transaction.9. Similarly, where a non-resident money-lender makes isolated loans to a
few residents in India, the loans do not necessarily constitute or emanate from a business connection with the borrowers even if
the borrowers are also money-lenders.10. But if the loan advanced outside India forms part of the lender's money-lending
business carried on in India, there would be a business connection in India and the interest on the loan would be deemed to
accrue in India under this section, although the interest may be payable and actually paid outside India.11.
However, interest on moneys lent abroad and brought into India, where the lending of the money abroad and the bringing of the
money into India were integral parts of one composite transaction or arrangement, was deemed to accrue in India under the
specific head (now deleted) 'money lent at interest and brought into India', even though such loan might not constitute or spring
from a business connection in India. [See further under 'Money lent at interest and brought into India…'.]

12. Property, Asset or Source of Income.—

As the Privy Council pointed out in CIT v Currimbhoy Ebrahim & Sons Ltd,12. the word 'property' in this clause is used as an
ordinary English word to be taken in its usual signification and is not confined to 'buildings or lands appurtenant thereto' as in s
22 which deals with 'income from house property', and that in the context of the section, the word 'property' includes both
movable and immovable property but means something tangible.13. If tangible property is situated in India, the income arising
through or from such property is deemed to be income arising in India under this section, eg in a case where furniture or
machinery situated in India has been hired under an agreement which makes the hire payable outside India.14. Intangible
property like a debt or other choses in action is not 'property' within the meaning of this section,15. but it would be covered by
the additional words 'any asset or source of income' which were inserted to fill the lacuna arising from the Privy Council's
decision.16. A debt due to a foreigner cannot be treated as an asset or source of income in India and the interest thereon cannot
be deemed to accrue in India, merely because the debtor is in lndia.17. 'Source' means not a legal concept but something which a

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practical man would regard as a real source of income.18. Consequently, income from the transfer of import entitlements relatable
to export activity in Pondicherry (outside India during the relevant period), although issued under Export Promotion Scheme
administered in India, was held to be income not from a source in India.19.
Dividends paid by an Indian company, which accrue abroad because they are declared and made payable abroad, may
nevertheless be deemed to accrue in India under this clause, since the source of the income, viz., the shareholding, is situated in
India.20. But such cases would now be covered by the more specific provision in cl (iv) of this sub-section. The Bombay High Court
held in Caltex (India) Ltd. v CIT,21. that where a company carries on business in India and pays dividends out of profits accruing
and taxed in India, the dividends arise directly from a 'source of income' in India, for the source of the dividends is the same as the
source of the profits made by the company. Therefore, the dividend-income of a non-resident share-holder may be deemed to
accrue in India under this clause and in respect of such dividends the company may be assessed as the 'agent' of the shareholder.
This decision overlooks the principle that the source of dividend income is the shareholding.22. The decision requires
reconsideration as regards companies which are incorporated abroad, which declare dividends abroad (though out of Indian
profits) and the sits of whose shares is abroad. It is noteworthy that cl (iv) of this sub-section which deems dividends to accrue in
India, is restricted in its application to Indian companies only.

13. 'Money Lent at Interest and Brought into India in Cash or in Kind': Deleted in 1976.—
Prior to 1939, interest on moneys lent abroad and brought into India was deemed to accrue in India only if the transaction of the
loan constituted or sprang from a business connection in India,23. and if there was no such business connection the interest on
the loan was not deemed to accrue in India.24. Under the 1922 Act after its amendment in 1939 and under this clause prior to
1976, any income arising directly or indirectly through or from any money lent at interest outside India and brought into India in
cash or in kind was deemed to be income accruing in India, irrespective of any business connection. The Finance Act 1976 deleted
from cl (i) this head of deemed accrual in India and inserted cl (v) considerably enlarging the legal fiction dealing with this topic.
[See under 'Interest, Royalty and Technical Fees'.]
In CIT v National & Grindlays Bank Ltd.,25. the Calcutta High Court held that 'money in kind' meant only that which retained its
character or quality as money; it meant money in recognised commercial forms like bills of exchange, IOUs, and even gold and
silver, but not goods or machinery.
The Federal Court held by a majority in Wadia v CIT,26. that this head of income contemplated and should be construed to mean
the bringing of the money into India with the knowledge of the lender and that the lending of the money at interest outside India
and the bringing of the money into India should be integral parts of one composite transaction or arrangement. This principle
was reaffirmed by the Supreme Court in CIT v Meenakshi Mills Ltd.27. In Wadia's case the moneys lent were brought into British
India with the knowledge of the lender and as an integral part of one composite transaction and therefore, the interest on the
loan which was payable and actually paid outside British India was deemed to accrue or arise in British India. Patanjali Sastri J in
his dissenting judgment held that this part of the section was ultra vires and invalid, since the bringing of money into India by
the borrower cannot constitute a sufficient territorial connection. Fazl Ali J doubted whether the words of the section were
sufficient to convey the comprehensive meaning that the lending of the money and bringing it into India should be parts of an
arrangement or scheme, and preferred to rest his decision on the other ground that the interest earned by the lender arose
through a business connection in India.
After the money was brought into India, the way in which it was used by the borrower was an irrelevant question.28.
Following Wadia's case, the Bombay High Court held in Porbandar State Bank v CIT,29. that where a foreign bank brought the
moneys of its depositors into India, the interest earned by the depositors was not income deemed to accrue in India under this
section and chargeable as such, unless the depositors had knowledge that their moneys would be taken into India and the
bringing of the moneys into India was an integral part of the transaction of the deposit.
Distinguishing National & Grindlays Bank and following the principle in Wadia, the Bombay High Court held in Salzgitter
Industrie Bau Gmbh v CIT,30. that a transaction might amount to a loan though money had not physically and directly passed
from the lender to the borrower. In that case, a non-resident company advanced money to its Indian subsidiary with which it had
a collaboration agreement and at the request of the subsidiary paid that money abroad, on behalf of the subsidiary, to the
supplier of the machinery imported by the subsidiary, and charged interest to the subsidiary in respect of such advances. On the
facts of the case the court held that the transaction amounted to a loan from the parent company to the subsidiary, brought into
India in kind, and the interest must be deemed to have accrued in India. In Meturit AG v CIT,31. also the foreign loan was utilised
in purchasing machinery which was imported into India. The Karnataka High Court dissented from National & Grindlays Bank
and held that the money lent was brought into India in kind and the interest on the loan must be deemed to have accrued in
India.
Interest received by a dealer outside India from purchasers in India for delay in paying the purchase price of goods, was not
income 'from any money lent at interest and brought into India'.32.

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14. Transfer of Capital Asset Situated in India.—

Capital gains arising from the transfer of a capital asset, whether movable or immovable, situated in India at the time of the
transfer, are deemed by this clause to accrue in India, irrespective of the place where the agreement of transfer is made or the
consideration for the transfer is payable.33. Where the shares of an Indian company are transferred, irrespective of whether the
transferor and transferee are non-residents, the gains are taxable in India under s 9(1)(i) and the DTAA as the capital asset is
situate in India.34. The views of the Supreme Court on extra-territorial legislation are incorrect but a critical analysis is outside the
scope of this commentary. This clause does not apply if the capital asset is not situated in India and if the transfer of the capital
asset is outside India.35. 'Capital asset' is defined by s 2(14), and 'transfer' by s 2(47).

15. Transfer of Shares between Two Non-residents.—

If a transfer of shares between two non-resident companies takes place outside India, earlier there was no liability to capital gains
tax on the ground that the overseas transfer of shares amounts to a transfer of the underlying assets in India. This principle was
well settled and several such transfers had never been subjected to capital gains tax. The erstwhile Foreign Exchange Regulation
Act, 1973 required prior permission of the Reserve Bank of India before there was transfer of any interest in any business in India.
This restriction under s 26(4) of FERA also applied to transfers made by two non-resident companies outside India. The transfer of
38.7 per cent. shares of a Hong Kong based company was questioned by the Special Director of the Reserve Bank of India who
took the view that by transferring these shares, there was a transfer of 38.7 per cent. of the undertaking of its Indian subsidiary.
The Delhi High Court pointed out that the undertaking of a company is not the same thing as shares of that company. The
acquisition of 38.7 per cent. did not mean that there was a transfer of interest of the business in India under s 26(4) of FERA. The
Delhi High Court rightly observed that there was nothing such as 38.7 per cent. of an undertaking of a company.36. Similarly, the
Madras High Court held that if there was a transfer of shares between two non-residents, it would not amount to transfer of
interest as contemplated by s 26(4) of FERA.37.
Despite this well settled and basic principle, a show cause notice issued to the telecom giant Vodafone went up to the Supreme
Court and resulted in the most controversial decision in income-tax history. The verdict was nullified by a series of drastic
retrospective amendments that virtually dried up foreign direct investment.
The Hutchison group entered the telecom sector in India in 1992 and, through various acquisitions, the company became
Hutchison Essar Ltd. (HEL). Over a period of 15 years, HEL acquired various companies and gradually expanded its operations
throughout India. It acquired interest in 23 telecom circles in India. Ultimately, HEL had a shareholding structure whereby 51.96
per cent. was held directly or indirectly by the Hong Kong Hutchison group, 33 per cent. was held by the Indian Essar group38.
and the remaining 15 per cent. was held by smaller shareholders. The shareholding structure was a complex web of companies
that had grown over the years and included several Mauritius based companies. The shareholding structure has been set out in
the Supreme Court decision.39. By late 2006, the Hutchison group decided to exit and invited open offers for sale of its 51.9 per
cent. holding and the additional 15 per cent. on which it exercised certain options. Vodafone was the successful bidder and
eventually purchased one share of a Cayman Island company that was owned by a Hutchison company for USD 11 billion.
Effectively, Vodafone stepped into the shoes of Hutchison and the HEL became Vodafone Essar Ltd. (VEL).
Initially, a notice was sent to the Indian company under s 163 seeking to treat VEL as a "representative assessee" of Vodafone
International. Subsequently, the Asst. Director of Income Tax (International), Mumbai, issued a show cause notice to Vodafone
under s 201(1A) as to why it should not be treated as an assessee in default for not deducting tax at source under s 195. Both
the notices (under ss 163 and 201) were challenged before the Bombay High Court. At that time, the provisions of s 201 did not
require Vodafone to deduct tax at source as s 201 applied only to persons who were referred to in ss 200 and 194. Realising the
difficulty of sustaining the notice under s 201, the Finance Act, 2008 retrospectively amended s 201. This retrospective
amendment was also challenged.
It is important to note that the show cause notice held that the transfer of shares was liable to capital gains tax on the basis of
ten key propositions:

1. What is transferred is in "substance" not "one share" of CGP but various rights and entitlements.
2. Business interests, industrial licence, goodwill, controlling interest, non-compete agreements and shares are capital assets
under s 2(14) of the ITA.
3. The real "transferor" is HTIL, not HTI (BVI) Holdings Ltd.
4. The shares constitute a "capital asset" situate in India.
5. The income is chargeable to tax under s 5(2) or, alternatively, under s 9(1)(i) read with s 45.
6. The transfer of shares results in "extinguishment of rights" and transfer of underlying assets, attracting capital gains tax.
7. The corporate veil may be lifted.
8. S 195 applies extra-territorially and regardless of chargeability.
9. VIH is an assessee-in-default both before and after the 2008 retrospective amendment.

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10. The 2008 amendment is not unconstitutional.

This notice was challenged in the Bombay High Court which dismissed the writ petition on grounds of alternate remedy and also
applied the effects doctrine.40. An appeal was filed to the Supreme Court which directed the tax authorities to decide the question
of jurisdiction as a preliminary issue and gave the assessee the right to approach the Bombay High Court, presumably via a writ
petition, in the event of an adverse finding. In the second round, the Bombay High Court held that the transaction was neither
sham nor a device to evade tax. Indeed, the first half of the judgment contains several observations that support the assessee.
The High Court held that the transfer of shares also resulted in transfer of other diverse rights and entitlements and, applying the
doctrine of apportionment, which is totally irrelevant to the dispute at hand, held that a part of the income was liable to tax.41.
The second Bombay High Court decision was also taken up on appeal to the Supreme Court which eventually resulted in the
landmark and controversial decision. One judgment was rendered by Chief Justice Kapadia and Justice Swatanter Kumar and a
concurring judgment by Justice K.S. Radhakrishnan.42.
Before the Supreme Court, the primary argument was that the transfer of shares outside India had the result of extinguishing its
property rights in the Indian subsidiaries and, consequently, the said transfer would attract capital gains tax. If this argument
failed, it was then contended that the income from the sale of one share in a Cayman Island company would nonetheless fall
within s 9 as the word "through" in s 9(1)(i), inter alia, means "in consequence of". Therefore, if the transfer of a capital asset in
India was in consequence of a transfer of share abroad, such indirect income would also be taxable in India. The Supreme Court
rejected both these contentions. The Supreme Court discussed not only the scope of different statutory provisions in the present
Act, but also the correctness of the judgment in Azadi Bachao Andolan, the meaning of "look at" and "look through" provisions,
tax avoidance and tax evasion, situs of shares and whether the purchase of one share was a colourable device/ sham transaction
or was a legitimate business transaction. The present note deals with the comments of the Supreme Court with regard to s 9
alone. The observations with regard to the other statutory provisions are contained in the respective sections namely ss 2(14),
2(47), 5, 45, 161 and 163. The observations of the Supreme Court that deal with interpretation are contained in s 1.
Section 9(1)(i) gathers in one place four types of income which have been set out above. The Vodafone case was concerned with
the last category and the question was whether the transfer of shares outside India would result in income accruing or arising,
directly or indirectly, "through the transfer of a capital asset situate in India". This last category consisted of three elements: (i)
existence of asset; (ii) transfer of asset; and (iii) situation of such asset in India. Unless all these elements exist, the last para of s
9(1)(i) would not apply. After carefully analyzing s 9(1)(i), the Supreme Court's findings can be summarized as under43.:—

(a) Section 9 is not a look-through provision. "Look through" and "Limitation of Benefits" have to be expressly provided for in the
statute or in the treaty.
(b) Unless the place of accrual of income is within India, a non-resident cannot be subjected to tax.
(c) Income must accrue or arise to a non-resident only on account of transfer of a capital asset situated in India.
(d) The deeming fiction of s 9 comes into play only when the income is not charged to tax on the basis that it is not a receipt.
The legal fiction of s 9 cannot be expanded by giving a purposive interpretation particularly if the result of such interpretation
is to transform the concept of chargeability which is also there in s 9(1)(i) particularly when one reads s 9(1)(i) with s 5(2)(b). A
process of interpretation cannot extend the former extended to cover indirect transfers of capital assets or property situated
in India, as the legislature had not used the word "indirect transfers". In contrast, s 64 covers indirect transfer.
(e) Section 9(1)(i) applies to capital assets and not to "underlying assets".
(f) The words "directly or indirectly" in s 9(1) go with income and not with the transfer of capital assets.
(g) The proposed Direct Tax Code [in s 5(6)] enable taxation of overseas transfer of shares where the market value of assets in
India represented at least 50 per cent. of the fair market value of all the assets owned by the company. This showed that s 9
of the present Act would not apply to such transaction.
In a concurring judgment, Radhakrishnan J. held that whenever Parliament wanted to tax income from assets transferred directly
or indirectly, it made express provisions as in the case of s 64 of the Act. The Bombay High Court rightly rejected the unfortunate
submission of the Revenue that a fraud had been perpetrated by Vodafone on the Supreme Court by suppressing vital and
material facts.44.

16. Situs of Shares.—

A share in a company situated in the Cayman Islands and having its registered office there would have its situs in that country.
Under the Indian Companies Act, the situs of the shares is where the company is incorporated (i.e. where the register of members
is kept) and where the shares are transferred. The assertion that the Register of Members and the transfer of shares had taken
place in the Cayman Islands was not rebutted by the Department in its impugned order nor traversed in the pleadings filed by
the Revenue. It was also not controverted during the arguments. Accordingly, the situs of the share will not be in India on the
ground that the underlying assets were situated in India.45. In the concurring judgment, it was held that a "look through"
provision will not shift the situs of an asset from one country to another. This can be done only by express legislation. The fact

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that the transfer of the CGP share resulted in Vodafone getting control of eight Mauritian companies did not mean that the situs
of the share would shift to India for the purpose of capital gains tax. It is submitted that, internationally, the situs of share is
where the company is incorporated and where the share can be dealt with by way of transfer. This proposition was also never
disputed by the Revenue before the Supreme Court.46. Even the Bombay High Court, did not hold otherwise on this issue47. and
neither did the Revenue file any appeal against this issue before the Supreme Court.
In the context of the India-Mauritius DTAA, capital gains arising in the hands of an alienator from alienation of shares situated in
India can only be taxed in Mauritius i.e. where the alienator is a resident. Shares are covered under Article 13(4) and not qualified
by the situs of the property, unlike para (1) to (3) of Article 13 which provides for the right of taxation based on the situs of the
property. Therefore, capital gains arising on alienation of shares, will be taxable in the State where the alienator resides.48.

17. Amendments Made to Nullify Vodafone Judgment.—

Explanations 4 and 5 to s 9(1)(i) were inserted by the Finance Act, 2012 with retrospective effect from April 1, 1962. These were
also part of a series of amendments designed to nullify every single observation in favour of the assessee in the Vodafone case.
The last para of s 9(1)(i) reads "through the transfer of a capital asset situate in India". The Department urged that the word
"through" must be read as "in consequence of". By giving this meaning, transfer of shares outside India would have resulted in
transfer of the underlying assets in India and thereby attracting capital gains. This plea has been rejected. Explanation 4 now
states that the word "through" would have always included the expressions given therein. It is submitted that the word "through"
has been used four times in s 9(1)(i) and the new meaning would apply in all four situations.
Explanation 5 to s 9(1)(i) is also to get over the observation of the Supreme Court that the situs of a share is where the registered
office is located. The plea of the department was that the value of the share transferred in the Cayman Island derived its value
from various assets of several subsidiary telecom companies. Under Explanation 5, a fiction is created by which the situs of shares
of a foreign company will be deemed to be situated in India, if that share derives its value substantially from assets located in
India. Thus, if a share derives its value substantially from assets located in India, whether directly or indirectly, it shall be deemed
to have been situated in India. Explanation 5 introduces a deeming fiction only for the limited purpose of deeming such shares to
be situated in India.49. Therefore, if a foreign company has subsidiaries in different countries (including India) but its value is
derived substantially from assets located in India, then the shares of the foreign company shall be deemed to be situated in India.
This can lead to amazing results. Thus, if a Japanese company has shares listed on the Tokyo Stock Exchange and their value is
derived substantially from assets located in India, those shares shall be deemed to be situated in India from 1962 onwards!
Consequently, if Japanese citizens transfer shares in Tokyo, any income that accrues or arises from such a transfer would
automatically be deemed to accrue or arise in India and the Japanese transferor has to deduct tax at source in Japan! It may be
difficult to find a more absurd provision than that contained in Explanation 5. It is contrary to settled principles of private
international law.
The disastrous consequences that would have resulted by amending the law from April 1, 1962 was mitigated by two Board
circulars issued in 2012 and 2017. The Board has issued letter No. F. No. 500/111/12009-FTD-1(Pt.) dated May 29, 2012
clarifying that assessments which have been completed under s 143(3) before April 1, 2012 will not be reopened under s 147.50.
The Board has also clarified that Explanation 5 will not apply to dividends declared and paid by a foreign company outside India in
respect of shares which derive their value substantially from assets situated in India.51.
This absurdity was also partly mitigated by Explanations 6 and 7 that were inserted by the Finance Act 2015 and the provisions
that were added in Explanation 5 by the Finance Act 2017. Explanation 5 will thus not apply to investments held by a non-
resident in an FII or by Category I and Category II Foreign Portfolio Investors [provisos to Explanation 5]. Due to changes made in
Regulatory laws, from April 1, 2020, investment in Category I Foreign Portfolio Investor will be excluded. It will also not apply to
income accruing or arising to a non-resident on account of redemption or buy-back of its share or interest held indirectly (i.e.
through upstream entities registered or incorporated outside India) in the 'specified funds' [Investment Fund under s 115UB and
Venture Capital Company or Fund under s 10(23DB)].52. Exemption has also been granted to eligible investment funds under s
9A; fund management activity will not constitute "business connection".
Explanations 5 and 6.—
The object of Explanation 5 was not to extend the scope of s 9(1)(i) of the Act to income which had no territorial nexus with India,
but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside
India.53. Situs of an intangible asset will be the situs of the owner of such assets.54. It is submitted that the deeming fiction
introduced under Explanation 5 will not apply to all assets and must be confined only to shares or interest in a company outside
India, which are the subject matter of a transfer. The situs of such property will generally be the place where the owner of such
property resides. This is based on the maxim "mobilia sequuntur personam" which means that movables follow the person and
the situs of such movables, which are intangible assets, is the domicile of the legal owner. In this context, reference may be made
to a decision of the Supreme Court of Texas.55.
Prior to insertion of Explanation 6, the expression "substantially" used in Explanation 5 necessarily had to be read as synonymous
to "principally", "mainly" or at least "majority". The Delhi High Court,56. after examining the Expert Committee report on the
retrospective amendment,57. UN model commentary, and OECD Model Commentary came to the conclusion that capital gains

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arising from the sale of a share or interest of a company overseas, which derives less than 50 per cent of its value from assets
situated in India would certainly not be taxable under s 9(1)(i) read with Explanation 5 thereto. Under Explanation 5, if on the
specified date, the value of assets, whether tangible or intangible (i.e, assets located in India) exceeds Rs. 10 crores and represents
at least 50 per cent of the value of the assets owned by the company, the share or interest shall be deemed to derive its value
substantially from the assets situated in India.
Explanation 6 was inserted by the Finance Act 2015, with effect from April 1, 2016. This Explanation has been inserted to clarify
what constitutes 'substantial value' for the purposes of Explanation 5. However, it is prospective and prior to its insertion, the law
laid down by the Delhi High Court in the Copal Research case will apply.
Explanation 6 further provides for the method of valuation, accounting period and specified date and will apply only when
Explanation 5 is applicable. Explanation 5, by way of a deeming fiction, creates a charge of income-tax on indirect transfers. If a
share or interest derives its value substantially from assets located in India, then such shares or interest are deemed to be
situated in India and their transfer will attract the provisions of s 9(1)(i). It is submitted that Explanation 6 is only a machinery
provision to determine when a share or interest would be deemed to derive its value substantially from assets located in India.
Thus, Explanation 6 will apply only if Explanation 5 is first applicable. If the conditions set out in Explanation 6, i.e., condition of
substantial value are not fulfilled, Explanation 5 will also not apply, i.e., on the principle that if the machinery provision fails, the
charge also fails.58.
Explanation 7, inserted by the Finance Act 2015, with effect from April 1, 2016, provides that Explanation 5 will not apply to small
investors holding no right of management or control, or holding less than 5 per cent of the voting power or share capital or
interest in the company.
The Board has also issued FAQs in the nature of a clarification on the applicability of Explanations 5, 6 and 7.59.

18. Clause (a) of Explanation to Clause (i) [Section 42(3) of 1922 Act]: Apportionment of Profits.—
Clause (a) of the explanation to sub-s (1)(i) makes a provision for the allocation of profits in respect of different operations of a
single business. It provides that in the case of a business of which some of the operations are carried out within and some outside
India, the profits of the business should be apportioned and only that portion of the profits which is reasonably attributable to
the operations carried out in India should be deemed to accrue in India.60. Receipts from a project management agreement are
liable to be taxed as business profit only to the extent attributable to the permanent establishment. The expression 'income' used
in this explanation means the total result of the business, so that if in place of income there are losses, they are as much to be
apportioned as income would be.61.
In CIT v Ahmedbhai Umarbhai,62. the Supreme Court held that the principle laid down in this explanation applied where the
goods are manufactured in one place and sold in another and that the profits might be apportioned between the manufacturing
and the selling operations. In the case before the Supreme Court, the assessee carried on the business of manufacturing and
selling groundnut oil. The oil was manufactured outside, but sold within India. It was held that the profits arising from such sales
should be apportioned between the two operations, viz., manufacture and sale, and only such portion of the profits as was
reasonably attributable to the sale should be deemed to accrue in India. Even apart from this explanation, when considering the
place of actual accrual of profits under s 5, in cases where the assessee carries on both manufacturing and selling operations, the
whole of the profits should not be considered as accruing from the sale or at the place of sale but a part of the profits should be
held to accrue at the place where the goods are manufactured. [See s 5(1)(b), under 'Apportionment of profits where goods are
manufactured in one place and sold in another'.]
Similarly, where goods are purchased abroad and sold in this country, the profits realised on the sales may, in some cases, be
apportioned and a part of the profits may be attributed to buying operations;63. but in other cases the mere act of buying may
be so negligible a part of the business operations as not to justify the allocation of any portion of the profits to that act.64.
Mahajan J said in Anglo-French Textile Co. Ltd. v CIT:65.
… it is n o t every b u sin ess activity o f a man u factu rer th at co mes w ith in th e exp ressio n 'o p eratio n ' to w h ich th e p ro visio n s o f s 42(3) [o f th e
1922 Act] are attracted. Th ese p ro visio n s h ave n o ap p licatio n u n less acco rdin g to th e kn o w n an d accep ted b u sin ess n o tio n s an d u sages
th e p articu lar activity is regarded as a w ell defin ed b u sin ess o p eratio n . Activities w h ich are n o t w ell defin ed o r are o f a casu al o r iso lated
ch aracter w o u ld n o t o rdin arily fall w ith in th e amb it o f th is ru le. Distrib u tio n o f p ro fits o n differen t b u sin ess o p eratio n s o r activities o u gh t
o n ly to b e made fo r su fficien t an d co gen t reaso n s… In a case w h ere all th at may b e kn o w n is th at a few tran sactio n s o f p u rch ase o f raw
materials h ave taken p lace in British In dia, it co u ld n o t o rdin arily b e said th at th e iso lated acts w ere in th eir n atu re 'o p eratio n s' w ith in th e
mean in g o f th at exp ressio n .

Where a non-resident insurance company canvasses business and receives premiums in India, remits them to a foreign country
and invests them there, the interest earned on the investment may be apportioned under this explanation, for the investment
which results in the interest-income is capable of being divided into separate operations, some of which take place within and
some outside India.66.
The apportionment of profits under this explanation should not be arbitrary but should be on a rational basis.67. Where the only
operation within India was the negotiation and conclusion of the contract and the contract was performed entirely outside India,
only ten per cent of the profits was deemed to accrue in India.68.

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The corollary to cl (a) of the explanation is that even if a business connection in India exists, no part of the income arising from the
business connection would be deemed to accrue in India if no operation at all is carried out in India.69. Thus, where under an
agreement between a non-resident and a resident, all the services are rendered by the non-resident outside India, no part of the
payment for such services would be deemed to accrue in India under cl (i) even if the agreement gives rise to a business
connection. This was laid down by the Bombay High Court in CIT v Tata Chemicals Ltd ,70. and reaffirmed by the Supreme Court
in Carborundum Co. v CIT,71. and CIT v Toshoku Ltd .72. A fortiori, if the agreement is between two non-residents and all the
services under the agreement are rendered abroad, the question of assessing any income under this Act on the ground of
business connection would not arise.73. In CIT v Qantas Airways Ltd.,74. where the assessee, an Australian company, earned
interest in Australia from Commonwealth Treasury Bonds in which investment was made from its insurance reserve, the Delhi
High Court held that in the absence of any material to show that the amount kept in the reserve was in fact linked with the
operations in India, the interest could not be deemed to have accrued in India under this section. Although no part of royalty or
technical fees would be deemed to accrue from a business connection in India under cl (i) if all services are rendered abroad and
no operation at all is carried out in India under cll (vi) and (viii) which were inserted by the Finance Act 1976. [See under 'Interest,
Royalty and Technical Fees'.]

19. Clause (a) of Explanation does not Apply where Profits actually Accrue or are Received in India.—
Clause (a) of the explanation applies in terms only to cases where the profits are deemed under cl (i) to accrue in India; it does not
operate to give relief in cases where profits actually accrue or are received in India and are therefore chargeable under s 5 apart
from this section.75. This explanation cannot afford any relief to residents, since the resident is chargeable in respect of income
arising in any part of the world [s 5(1)(c)]. [See under 'Section does not Apply where Income Actually Accrues or is Received in
India'.]

20. Clause (b) of Explanation to Clause (i): Purchase of Goods in India for Export.—
Under the 1922 Act which did not contain a provision corresponding to cl (b) of the explanation, it was held that even operations
which were confined to the purchase of goods in India might constitute a business connection and a part of the profits on sales
abroad might be deemed to accrue here.76. If raw materials were regularly and systematically purchased in India, and the
manufacture and the sale took place abroad, the purchase of raw materials would be a business operation; a portion of the profits
might be reasonably attributed to such acts of purchase in India and such portion of the profits might be deemed to arise in
India.77. The principle of these decisions still holds good to the extent that systematic operations of purchases of goods in India
may amount to a business connection in India. But in the case of non-residents (though not in the case of residents who are not
ordinarily resident), the consequent tax liability is negatived by cl (b) of the explanation, the effect of which is that no income is
deemed to accrue in India to a non-resident through or from operations confined to the purchase of goods in India for export
even if the purchases are made through a regular agency established in India for that purpose.78.
Formerly, this clause of the explanation was subject to the proviso that (i) the non-resident should have no office or agency in
India for carrying out the operations of purchase and (ii) the goods should not be subjected to any kind of manufacturing process
before being exported from India. But this proviso was deleted by the Finance Act 1964, and consequently, it has been held that
no income could be deemed to have accrued to the non-resident assessee in India where, on his instructions, his agent purchased
dress material, got it stitched into garments and exported such garments to him abroad.79.
A service provider who is neither the purchaser nor his agent will not come within Explanation 1(b) to s 9(1)(i). The language in
the expression cannot be stretched to extend the benefit to persons who provide only support services to non-residents in
connection with purchases.80. Where the assessee purchases gold to convert it into jewellery for export, the income accrued or
arose in India and Explanation 1(b) to s 9(1)(i) will not apply because the provisions of s 5(2) are not controlled by s 9(1).81. The
purchases made by the liaison office would get the benefit of Explanation 1(b).82. For a criticism of the view taken by the AAR of ss
5(2) and 9(1), see commentary under sub-section, supra.
A foreign company had another foreign company as its agent. The agent had an office in India, and habitually secured orders for
its principal from India. While the contract for the sale of the goods was entered into between the principal and the customer, it
was found that the principal transacted almost solely through the orders procured by the agent. The agent was also completely
dependent on the income from securing orders for his principal from its Indian office and did no other business. Hence, even
though the agent was a foreign company, it was held that it constituted a business connection of the foreign company in India.83.

21. Clause (c) of Explanation to Clause (i): Collection of News in India.—

Clause (c) of the explanation provides that in the case of a non-resident running a news agency or publishing newspapers,
magazines or journals, no income shall be deemed to accrue in India through or from activities confined to the collection of news
and views in India for transmission abroad.84.

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22. Clause (d) of Explanation to Clause (i): Shooting Films in India.—

In the circumstances stated in this clause, no income is deemed to accrue to a non-resident individual, firm or company through
or from the shooting of any cinematography film in India. The remuneration of a non-resident foreigner who renders service in
India in connection with such shooting is exempt under s 10(5A). [Cf s 285B.]

23. Clause (e) of Explanation to Clause (i): Display of Uncut and Unassorted Diamond.—
In the circumstances stated in this clause, no income is deemed to accrue to a foreign company engaged in the business of
mining of diamonds through or from the activity of display of uncut and unassorted diamond in a special zone notified by the
Central Government.

24. Evidence of Business Connection: Question of Law.—

Whether there is any evidence to support the inference of a 'business connection', or whether the facts of the case constitute a
business connection within the meaning of this section, is a question of law. 85. Similarly, the question whether there is any
evidence to justify the finding that profits accrued to a non-resident through a business connection in India is a question of
law.86. However sceptical the attitude which the income-tax authorities may think fit to adopt towards the declarations offered
and the entries made in the assessee's books, a mere refusal to believe the evidence produced by the assessee to the effect that
no profits accrued to the non-resident from the business connection is not, in the absence of any positive evidence, sufficient to
entitle them to hold that the non-resident was in receipt of profits arising from the business connection.87.

25. Sub-sections (1)(ii) and (2) [Explanation 2 to Section 4(1) of 1922 Act]: Salaries earned in India.—
Clause (ii) of sub-s (1) provides an artificial place of accrual for income taxable under the head 'Salaries'. It enacts that income
chargeable under the head 'Salaries' (s 15) is deemed to accrue or arise in India if it is earned in India, i.e. if the services under the
agreement of employment are or were rendered in India, the place of receipt or actual accrual of the salary being immaterial for
this purpose. However, the Gujarat High Court88. had earlier taken the view that the words 'earned in India' occurring in cl (ii)
must be interpreted as 'arising or accruing in India' and not 'from service rendered in India'. So long as the liability to pay the
amount under the head 'Salaries' arises in India, cl (ii) can be invoked. If the liability to pay arises out of India and the amount is
payable outside India, cl (ii) cannot be invoked. This view was superseded by the insertion of an Explanation in cl (ii) by the Finance
Act 1983 with retrospective effect from April 1, 1979. It has been held that this Explanation is not declaratory and cannot apply to
any period anterior to April 1, 1979.89. The relevant test to be applied is to determine where the services have been rendered. If
the services were rendered in India, then the salary constitutes income arising in India.90. Thus, salaries paid in the USA for the
period worked in India would be deemed to arise in India. However, special allowances paid to foreign employees, although
income under s 2(24)(iiia) and (iiib), would be exempt under s 10(14) of the Act.91. Income in respect of the 'rest period' or 'leave
period' which is preceded and succeeded by services rendered in India and forms part of the service contract of employment is
also a salary 'earned in India' as a result of an amendment in the explanation by the Finance Act, 1999 with effect from April 1,
2000.92. This amendment is intended to apply prospectively and this was the understanding of the CBDT as well. Accordingly,
amounts payable to British employees for off-breaks in the U.K. were not taxable prior to April 1, 2000 even though these
employees were working on oil-drilling rigs in the territorial waters of India.93.
Taxability of the salaries of non-residents working in India would also depend on the relevant terms of the Double Taxation
Avoidance Agreements. When the salaries were paid in Italy and were not borne by any permanent establishment in India, they
were not taxable in terms of Article 16(2)(c) of the DTAA between India and Italy. Taxes collected by the Indian company on behalf
of the Italian employer were also not taxable as a taxable perquisite in the hands of the non-resident employees under s 17(2)
((iv).1.
An exception to this clause is provided by sub-s (2) under which pensions payable outside India to certain categories of
government officers and judges, who reside permanently outside India, are not deemed to accrue in India. [Article 314 of the
Constitution which is referred to in this sub-section was repealed by the Constitution (Twenty-eighth Amendment) Act 1972 with
effect from August 29, 1972.]
Difficult questions arise regarding the place of accrual of salaries. [See s 5(1)(b), under 'Salaries and Pensions'.] This clause obviates
a part of the difficulty by providing an artificial place of accrual in one case. Since residents are chargeable on income accruing in
any part of the world, it cannot make any difference in their case whether income is treated as accruing abroad or is deemed to
accrue in India. The main effect of the clause is to charge non-residents, and those who are resident but not ordinarily resident,
on salary or pension earned in India even where it actually accrues abroad and is received abroad.
When Indian nationals were sent on deputation outside India, it was held that salary paid to employees deputed abroad was not
taxable in India as the services were rendered outside India and there was no liability to deduct tax under s 192 of the Act, even if
the salary had been paid in India.2. In contrast, the Delhi High Court has held that employees seconded or deputed to India

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would constitute a "service PE" of the original employer.3. It is submitted that this decision must be confined to its peculiar facts,
as the court found that the contract was not in the nature of reimbursement as the foreign entity continued to be the real
employer.4. It is submitted that once the income of a non-resident employee, who renders service in India, has been taxed either
under s 9(1)(ii) or under Article 15 of the DTAA (income from employment), subsequent reimbursement cannot be taxed, either as
FTS or business income of the foreign company. As a detailed discussion on this controversy is outside the scope of this book,
readers may usefully refer to the undernoted commentaries.5.
This clause applies even to salary paid by a foreign government to its employee serving in India, because salary payable by a
foreign government which was not taxable under the head 'Salaries' in the 1922 Act is taxable under that head (s 15) in this Act.6.
Since the Notification dated 31.3.1983 extending the Income-tax Act to the continental shelf of India was not applicable to the
assessment year 1983-84, the salary received by the non-resident assessee for the lay off period outside India was not
chargeable to tax under s 9(1).7.

26. Sub-section (1), Clause (iii) [Explanation 2A to Section 4(1) of 1922 Act]: Salaries for Government Service outside
India.—
Clause (iii) of sub-s (1) provides that in the case of a citizen of India who is employed by the government, income chargeable
under the head 'Salaries' which is payable for service outside India is deemed to accrue in India even if the salary is payable
outside India, the place of actual accrual of the salary being immaterial for this purpose.8. The intention is to bring to charge
salaries received by government servants posted abroad, who technically become non-residents after sometime and thus, escape
Indian taxation. However, in such cases, allowances and perquisites paid or allowed by the government outside India are exempt
from tax under s 10(7). The word 'Government' in this clause does not include the Government of Sikkim before the extension of
the Act to Sikkim.9.

27. Sub-section (1), Clause (iv) [Explanation 3 to Section 4(1) of 1922 Act]: Dividend paid Abroad by Indian Company.
—
Explanation 3 to s 4(1) of the 1922 Act deemed dividends paid abroad by an Indian company to accrue in India only to the extent
to which they were paid out of profits subjected to income-tax in India.10. This clause is wider in scope and deems a dividend paid
abroad by an Indian company to accrue in India in every case.
An Indian company must have its registered office in India [s 2(26)], and therefore its share-register would be kept in India. The
situs of shares is the place where the share-register is kept.11. Now, the situs of shares may be material in the case of any attempt
to levy a tax like estate duty or legacy duty on the corpus of the shares. But when the attempt is to tax income and not the
corpus and the question to be considered is the place of accrual of the dividend-income, the situs of the shares has no
importance.12. Thus, a dividend declared abroad and payable abroad would not accrue in India even though the company may be
Indian and the situs of the shares may be in India.13. But such a dividend declared by an Indian company would be deemed to
accrue in India under this clause, or in any event under cl (i) on the ground that the source of income is situated in India.14. The
effect of this clause is that all shareholders—even those who are non-resident or resident but not ordinarily resident—are liable to
charge under s 5 in all cases in respect of a dividend declared by an Indian company, wherever it is payable or paid.

28. Sub-section (1), Clauses (v), (vi) and (vii): Interest, Royalty and Technical Fees.— General.—
The Finance Act 1976 effected three basic changes as regards assessment on non-residents.

(i) It inserted cll (v), (vi) and (vii) in s 9(1), deeming interest, royalty and technical fees to accrue or arise in India, making the non-
resident recipient chargeable to tax in cases where there was no tax liability under the pre-existing law.
(ii) It inserted ss 44C and 44D denying deductions, entirely or in part, in respect of expenses wholly and exclusively incurred for
the purposes of the non-resident's business or for earning the royalty or technical fees.15.
(iii) It inserted s 115A prescribing new rates of tax for dividends, royalty and technical fees in the case of foreign companies.
The Parliament of India can legislate only for the territory of India. As far as foreigners and foreign income are concerned, the
well-established principle is that given a sufficient territorial connection or nexus between the person sought to be charged and
the country seeking to tax him, income-tax may properly extend to that person in respect of his foreign income. The connection
must be a real one and the liability sought to be imposed must be pertinent to that connection. [See s 1, under 'Territorial
connection, and extraterritorial operation of the Act'.]
Clauses (i) to (iv) of s 9(1), which deem foreign income to accrue in India, are intra vires the powers of the Parliament, since they
proceed upon a sufficient territorial connection. [See under 'Intra vires', and under 'Money lent at interest and brought into
India…'.] But cll (v)(b), (vi)(b) and (vii)(b) seek to charge a foreigner in respect of his income outside India only because the

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payment is made by an Indian resident, even where the income arises under a contract which is made and performed entirely
outside India and neither the income nor the contract has any connection with India. Unlike the residence of the assessee himself,
the residence of the person from whom the income is received can never afford a sufficient, real or pertinent territorial nexus to
justify the levy of income-tax on a foreigner in respect of his income which has nothing to do with India. Under these clauses, the
foreigner is made liable to Indian income-tax in every case in respect of interest, royalty or technical fees received abroad from an
Indian resident for services or other consideration rendered wholly abroad, the only exception being the case where the payment
is made for the purposes of the Indian resident's business, profession or source of income abroad. If the Indian Parliament can
cast the net wide enough to collect tax in such cases where the foreigner's income has no nexus with India, only because the
income is derived from a transaction with an Indian, it can equally levy a tax on a hotel in a foreign country where an Indian goes
to stay or dine, or on a foreign store where an Indian buys shirts or grocery, or on a foreign physician whose services are sought
by an Indian while abroad. Not only are these clauses contrary to the well-settled international norms of taxation on a foreigner in
respect of his income accruing, arising and received outside the taxing state, but they are against the letter and the spirit of the
various tax treaties entered into by India with foreign countries, though they do not, and cannot, supersede those treaties.16.
Further, it is difficult to conceive of more powerful fiscal deterrents to keep away foreign collaborators.
If the scope and validity of these clauses are questioned before a court of law, the alternatives before the court would be either to
strike down the provisions as ultra vires the legislative powers of the Indian Parliament or to read down the provisions so as to
restrict their scope only to those cases where on the facts a sufficient nexus exists between India and the foreigner's income
accruing and received abroad. However, the Andhra Pradesh High Court held that these provisions are within the legislative
competence of the Parliament.17.
The High Court's decision is not reported and the matter was taken up in appeal to the Supreme Court. On further appeal to the
Supreme Court, Pathak C.J., realizing the importance of this issue, referred the question to a Constitution Bench18. with these
observations:
"Bu t th e qu estio n is w h eth er a n exu s w ith so meth in g in In dia is n ecessary. It seems to u s th at u n less su ch n exu s exists Parliamen t w ill h ave
n o co mp eten ce to make th e law . It w ill b e n o ted th at Article 245(1) emp o w ers Parliamen t to en act law fo r th e w h o le o r an y p art o f th e
territo ry o f In dia. Th e p ro vo catio n fo r th e law mu st b e fo u n d w ith in In dia itself. Su ch a law may h ave extra territo rial o p eratio n in o rder to
su b serve th e o b ject, an d th at o b ject mu st b e related to so meth in g in In dia. It is in co n ceivab le th at a law sh o u ld b e made b y Parliamen t in
In dia w h ich h as n o relatio n sh ip w ith an yth in g in In dia. Th e o n ly qu estio n is o n e o f su b stan tial imp o rtan ce, sp ecially as it co n cern s
co llab o ratio n agreemen ts w ith fo reign co mp an ies an d o th er su ch arran gemen ts fo r th e b etter develo p men t o f in du str y an d co mmerce in
In dia. In view o f th e great p u b lic imp o rtan ce o f th e qu estio n , w e th in k it desirab le to refer th ese cases to a Co n stitu tio n Ben ch an d w e do
so o rder."

As Electronics Corporation, the assessee, withdrew its appeal before the Supreme Court, the validity of ss 9(1)(vi) and 9(1)(vii) was
never considered.
Several years later, the Andhra Pradesh High Court held that fees paid to a financial consultant in Switzerland for raising money
through loans abroad was taxable "as fees for technical services". The court held that fees for raising finance was as much a
technical or consultancy service as it was with regard to the management or generation of power or plant and machinery. The
High Court also held that there was no business connection between the power generating company and the Swiss company.
Accordingly, it held that amounts could not be remitted to the Swiss company without deduction of tax at source and dismissed
the writ petition. The writ petition had not challenged the validity of s 9(1)(vii) and the plea of constitutional validity was taken
only as an alternative submission. This was also rejected in view of the earlier unreported decision in the Electronic Corporation
case of the Andhra Pradesh High Court and it was noted that the matter had been referred to a Constitution Bench.19.
Despite the submission of the learned counsel for the assessee that he did not wish to argue the constitutional validity, the
Supreme Court went on to decide the scope of Article 245(2) at the behest of the Attorney General.20. It is submitted that the
Supreme Court was incorrect in doing so; it should have declined to rule on a constitutional question without proper submissions
on behalf of the assessee. The Supreme Court should have confined itself to the question whether fees paid for raising funds
abroad would come within the definition of "fees for technical services". This question remained unanswered although this was the
main question that should have been decided. However, the Supreme Court held that Parliament had power to make laws with
respect to extra territorial aspects or causes that had an impact or nexus with India. This decision has been discussed in greater
detail in s 1 under the heading "Territorial connection and extra-territorial operation of the Act."

29. Clause (v): Interest.—

Interest payable by an Indian resident and taxable under cl (v)(b) may be wholly or partly entitled to exemption under s 10(15)(iv).
'Interest' is defined by s 2(28A) as including all categories of interest and also a service fee or commitment charge. It also includes
interest on unpaid purchase price payable by letter of credit.21. This clause will apply only to payment of interest on a debt and
not to penal interest paid as a part of the deferred sale consideration.22.
The scope of this clause was expanded by inserting an Explanation by the Finance Act, 2015. The Explanation specifically applies
only to non-resident banking companies. Now, in the case of a non-resident engaged in the business of banking, any interest
payable by the permanent establishment of such non-resident in India to the head-office or any other permanent establishment
or any other part of such non-resident outside India shall be taxable in India. Charge on such interest will be in addition to the
income attributable to the permanent establishment in India.

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It is submitted that this amendment is to overcome the decision of a Special Bench of the Tribunal23. which had held that the
interest paid to the head office of the bank by its Indian branch, which constitutes its PE in India, is not deductible as expenditure
under the domestic law, being payment to itself. However, the same is deductible while determining the profit attributable to the
PE, which is taxable in India as per Article 7(2) and 7(3) of the India-Japan DTAA. This was affirmed by the Bombay High Court as
it refused to admit any question of law on the said issue.24.

30. Clauses (vi) and (vii): 'Royalty' and 'Fees for Technical Services'.—
The effect of cll (vi) and (vii) is merely to deem income to accrue in India when in fact it accrues abroad, but these clauses do not
deem any capital receipt to be an income receipt. Therefore, if the amount of royalty or technical fees is on capital account, these
clauses would have no application. Similarly, if the receipt is not income at all (like reimbursement of expenses) these clauses
would have no application.25.
The definitions of the terms 'royalty' and 'fees for technical services' are only for the purposes of this section and cannot apply to
a Double Taxation Avoidance Agreement made under s 90 of the Act unless expressly so provided. 26. Receipts which are royalty
or fees for technical services under these clauses would not be chargeable to tax if the relevant treaty so provides.27.
Under the provisos to cll (vi) and (vii), royalty and fees for technical services are not deemed to have accrued or arisen in India if
they are payable in pursuance of an agreement made before April 1, 1976 and approved by the Central Government.28.
Agreements entered prior to April 1, 1976 and approved by the Government will get the benefit of the proviso.29. If an
agreement is entered into prior to April 1, 1976, the amount payable under the agreement is not liable to be taxed under s 9(1)
(vi) or (vii), irrespective of the date on which the agreement is approved by the Central Government.30. In the absence of any
indication that the new agreement executed after April 1, 1976 was in continuation of an earlier agreement entered into before
that date, the payment made under the later agreement was held to be taxable under cl (vii).31.
Although royalty was paid by a resident, it was not deemed to have accrued or arisen in India since the royalty was paid out of
export sales and, hence, the source for royalty was the sales outside India; the royalty paid on export sales would not be
taxable.32. This decision may not be good law after the addition of the Explanation to s 9 with retrospective effect from June 1,
1976. Where the goods are manufactured outside India, sold outside India and are to be used outside India, royalty income from
bundled software sold along with such goods will not accrue or arise in India.33.
Clause (vi) is a specific clause dealing with royalty and therefore, if royalty covered by the substantive part of the clause is
excluded by the proviso, the department cannot seek to bring it under cl (i) or (vii).34. Similarly, if 'fees for technical services'
covered by the substantive part of cl (vii) are excluded by the proviso to that clause, they cannot be brought under cl (i).35. On the
other hand, the clauses would apply even when there is no business connection under cl (i).36.
The question whether a payment under an agreement is royalty or fees for technical services must be decided strictly in
accordance with the definition. It is to be determined on the facts and circumstances of the case and the terms of agreement.37. It
is the true nature of the consideration and not the nomenclature of an agreement that determines whether a particular receipt is
'royalty' or 'fees for technical services' or not;38. the contractual obligation contained in an agreement must be examined against
the backdrop of the definitions so as to ascertain the true nature of payments. The entire agreement39. and not merely the
preamble should be examined to ascertain the true nature of consideration.40.
It is for the revenue to establish that the payment is covered under cl (vi) or (vii) and therefore, taxable, but the burden to prove
that the case falls under exclusionary parts of explanation 2 in both the clauses, and hence, the amount is not taxable, is on the
assessee.41.
It is important to note that the provisions in Chapter IV regarding presumptive taxation of certain kinds of income, such as ss
44BB, 44AD, 44AE, 44AF, 44B, 44BBA, 44BBB etc. are independent of the provisions of s 9. If the income of a non-resident does
not fall within s 9, it could nevertheless be taxable under those sections. The AAR held that certain incomes were fees for technical
services and royalties, but held that they were not taxable under those heads, but taxable under s 44BB at the presumptive rate
mentioned therein.42. [For detailed discussion, see commentary to s 44BB at p 1348.]
(a) Royalty.—
A lump sum consideration which is in the nature of income chargeable under the head 'capital gains' is excluded from the
meaning of the term royalty. 43. Payment made for outright purchase of technical know-how (drawings, designs, shelters, etc.) is
not royalty.44. Similarly, payment for assignment of copyright for 99 years is perpetual and akin to a sale; consequently, it is not
royalty.45. Where a non-resident company deputed an expert to supervise the construction and installation of a kiln in India (and
not for imparting any information), the payment to it was held not to be income by way of royalty under cl (vi).46. The term
'royalty' as used in Explanation 2 to s 9(1)(vi) was at par with the term 'royalties' as used in Article 12(3)(b) of the DTAA and the
term 'fees for technical services' as used Explanation 2 to s 9(1)(vii) was analogous to the term 'fees for technical services' as used
in Article 12(4)(a) of the DTAA. Thus, the payments made by agents who were subscribers resident in India to the applicant were
chargeable to tax in India under Article 12 of the DTAA as well as under s 9.47.

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A referral fee did not amount to 'royalty' within the meaning of Explanation 2 to s 9(1)(vi) as there was no information imparted
regarding commercial knowledge or experience; providing "bald commercial information was not royalty". The OECD has observed
that "commercial information" represents what a manufacturer cannot know from a mere examination of the product. The
Memorandum to the Indo-US Treaty, in the context of Article 12(3), explains this expression to mean information that is not
publicly available and cannot be known by a mere examination of the product or mere knowledge of a process or technique.48.
In CIT v Neyveli Lignite,49. the foreign company supplied machinery to the Indian company and incidentally also supplied the
design of the manufacturing machinery and information concerning the working of the machinery. The design was not supplied
to enable the Indian company to manufacture the machinery, nor was any license of any patent involved in the transaction. The
Madras High Court held on these facts that the payment to the foreign company was not covered by either cl (vi) or (vii) of s 9(1)
and therefore, not taxable.
Similarly, where a foreign company received payments in consideration of it foregoing exports in various markets and transferring
certain export orders in favour of an Indian company, it was held that such payments did not amount to 'royalty' or 'fees for
technical services'.50. Payment made for construction/installation of kiln is not payment for imparting information concerning the
working of the use of a plant, invention or model within the meaning of cl (ii) or imparting of information concerning technical or
industrial skill under cl (iv) of Explanation 2 to s 9(1)(vi).51. The subscription fees received by the applicant from the licensee (user
of the database) did not fall within Explanation 2(v) to s 9(1)(vi) dealing with 'royalty'.52. Even where an earmarked circuit was
provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to
use by the customer by means of positive acts, it did not fall within the category of 'royalty' in Explanation 2(iva) to s 9(1)(vi).53.
However, payments received for the supply of drawings and designs for the construction of a bridge,54. or for providing
specialised knowledge for manufacturing a particular commodity,55. or for the supply of know-how and information necessary for
setting up a plant56. or for a licence to manufacture and sell certain products and use of patents57. or for engineering and
procurement services and project management services58. were held to be payments by way of royalty and, therefore, taxable.
Payment towards technology, technical information and assistance for the purpose of manufacture is royalty. The court held that
the grant of the right to use or permission to use intellectual rights and know-how would be covered under the definition of
royalty.59.
Payments made for leasing space segment capacity in a satellite and transponder capacity will be royalty under s 9(1)(vi). It was
held that the reservation of a particular capacity or bandwidth is only a facility which is offered by the owner of the satellite
infrastructure. Such payments will also not be for the use of the satellite equipment.60. This judgment has been nullified by a
retrospective amendment, which is discussed below. The meaning of the expression "use" and "right to use" occurring in cl (iva) of
Explanation 2 to s 9(1)(vi) was considered in detail by the Authority for Advance Ruling. It was held that61. the word "use" in
relation to equipment occurring in cl (iva) is not to be understood in the broad sense of availing the benefit of an equipment. The
context and collocation of the two expressions "use" and "right to use" followed by the word "equipment" suggest that there
must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage is
taken from a sophisticated equipment it will be difficult to say that the recipient/customer uses the equipment as such. The
customer merely makes use of the facility though he does not himself use the equipment. Further, the expression "use" does not
simply mean taking advantage of something or utilising a facility but what is contemplated by that word is that a customer
operates or controls the equipment in some manner and exercises a certain degree of possession and control. Merely using
telecom equipment or a cable network for transmission of voice and data through the telecom band-width will not amount to
using the equipment. The customer merely makes use of the facilities that are offered by the infrastructure or network.
Ostensibly, the above judgments have been nullified by the amendments introducing Explanation 5 to s 9(1)(vi). However, the
explanation only refers to "right, information or property" and does not refer to "equipment". It is submitted that the legislature
has, to use the expression of Chagla, C.J., "misfired". As elucidated below, the term "property" only refers to intangible property
and not "equipment".
The Madras High Court, without referring to the Explanations, has now disagreed with the AAR and held that even the time-
charter of a ship would fall under cl (iva) of Explanation 2 to s 9(1)(vi). It has held that the term "use" would include even
"economic exploitation", and that the fact that the possession and control of the ship remains with the ship-owner in a time-
charter is irrelevant. It has held that the questions of whether there is a "transfer of a right to use" is relevant only for sales tax,
and that cl (iva) uses the much wider expression "use or right to use", which would even include an "economic" use. It held that
while the charterer is not in possession of the vessel in the case of a time-charter, he has sufficient control over where the vessel
will sail and when it will sail. It was further observed that the charterer had the power to let the vessel remain idle during the time
of the charter and even sublet the same. Hence, even though, for the purposes of sales tax there was no transfer of a right to use,
for the purposes of cl (iva), the charterer was "using" the ship.62.
This judgment, it is submitted is incorrect for the following reasons. First, under shipping law, in a time-charter, the ship is not
"used" by the charterer at all. The shipowner "uses" the ship to provide a service to the charterer. Hence, the charterer acquires no
"use" or even a "right to use" the ship. Secondly, the question of control is relevant to "use or right to use" under cl (iva) because
this would lead to an absurd situation where every time a non-resident uses a piece of equipment to render services to a resident,
the payment for the same will become taxable as "royalty". For instance, if an Indian resident gives contracts with a non-resident
for any job-work, and the non-resident performs the same in India using some equipment, it will mean that the resident is using
that equipment since he is economically exploiting the same. Thirdly, this leads to the contradictory result that a domestic time-

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charter will not be royalty for the purposes of deduction under s 194J, but an international time-charter will be royalty for the
purposes of s 9, read with s 195. Fourthly, the word 'ship' was erroneously included within the meaning of "equipment" under the
term "royalty" under s 9(1)(vi). The Court ignored the fact that the expression used under the Act is 'industrial, commercial or
scientific equipment' and not 'equipment' simpliciter. So is the expression in DTAA. The High Court ought to have appreciated
that the words used in DTAA must be understood in the context of common parlance.
In a later decision, the Madras High Court distinguished its decision in Poompuhar Shipping and held that hiring of dredging
equipment will not come within the meaning of royalty under the India-Netherlands DTAA.63.
The Madras High Court, in another case,64. held that the consideration paid by an Indian customer for use of bandwidth from a
leased line, is in the nature of leasing of equipment, and amounts to "use of equipment" and falls within the meaning of the term
"royalty" under Explanation 2, cl (iva) and is taxable in India. The High Court, upon examination of the agreements, came to the
conclusion that the Indian customers had obtained economic interest in the equipment. The High Court rejected the argument of
the assessee that it only rendered service in India which is a standard facility, and held that there is use of equipment by the
assessee through which services are delivered by the assessee to the customer (ie. transmission of the data/voice from one end to
another). However, under the DTAA, for Article 12 to apply, in a case of equipment royalty, the following factors should have been
tested:

(i) Who is in physical possession and controls the property/equipment?;

(ii) Who has a significant economic or possessory interest in the property?;
(iii) Who bears the risk of substantially diminished receipts or substantially increased expenditures if there is non-performance
under the contract?;
(iv) Who uses the property/equipment concurrently to provide significant services to entities unrelated to the service recipient?;
(v) total payment for the service does not substantially exceed the rental value of the computer equipment for the contract
period.65.
There is unfortunately no discussion on these issues. The OECD commentary on the subject has opined that when payment is
made for the service and not for the use or right to use any equipment, such payment is taxable only as business income.66.
Moreover, the High Court, while interpreting the definition of the term royalty as defined in the India-Singapore DTAA, came to
an erroneous conclusion that the term royalty under the Act and the DTAA are in pari materia, and applied the definition of
'process' under Explanation 6 to interpret the DTAA, without even considering the scope of Article 3(2) of the DTAA.67. The fact
that Explanation 6 was inserted with retrospective effect to overcome certain judicial precedents was also overlooked by the High
Court. It is submitted that there has been no amendment in the DTAA, and reading Explanation 6 into the DTAA would,
therefore, result in unilaterally enlarging the scope of the term royalty in the DTAA, which is impermissible. It is also seen that
before the High Court, no arguments were raised as to whether the cable is an equipment or not under the definition of
royalty.68. It is submitted that Explanation 6 is contrary to the internationally accepted interpretation of the expression 'secret
formula or process'. A leading author on the subject has commented that the 'attribute secret is constitutive for both formula and
process…'.69. The author also traces the history, and states that the original draft of OECD model wording was 'secret process and
formulae'.70. Thus, Explanation 6 should not be used to understand the meaning of "royalty" under the DTAA.
Article 3 of the DTAA applies unless the context otherwise requires. It must also apply to the interpretation of the convention by
the court. It has the apparent effect of domesticating certain terms in the convention to national law. However, it applies only to
terms which are not defined by the convention, and it does not apply if the convention makes it clear that some other meaning
applies.71. For these reasons, it is submitted that the decision of the Madras High Court does not lay down the correct law and
requires reconsideration. [Also see Commentary to s 90 at p 2010.]
Where a lump sum amount was paid to the foreign company for providing technical know-how, the entire amount was held to be
royalty, notwithstanding the fact that services were rendered in India by two personnel of the foreign company for fifteen days to
set up the plant.72. The fees for services in the form of technical assistance and consultancy connected therewith were taxable as
'royalty' under s 9(1)(vi).73. A group of 24 companies entered into an agreement by which the Indian entity would co-ordinate
research and development relating to the business area for the entire group. The costs of the research would be shared by the
entire group as per a cost allocation agreement, and the benefits of the research was to be shared between all members of the
group. The members would have full right to exploit any intellectual property generated as a result of such research. These rights
would be held by all the group companies jointly. The AAR rejected the contention that the payments made to the Indian entity
were reimbursements, and held that they were royalty payments.74.
Where the foreign company entered into a single contract for designing, engineering, manufacturing, testing and supplying
machinery, it was held that it was not possible to apportion the consideration for the design on one part, and the other activities
on the other part, and hence, the consideration for the transfer of design did not come under the purview of cl (vi).75. The
resident assessee had an agreement with a non-resident for advertisement, publicity, sales promotions and allowing the non-
resident to use its trade name. This did not amount to royalty under s 9(1)(vi) and the DTAA. The question of deducting tax at
source thus did not arise.76. If the use of trademark is incidental, the payment cannot be held as royalty.77.

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From assessment year 1991–92, cl (vi) is not applicable to a lump sum payment made by a resident for the transfer of all or any
rights in respect of computer software supplied by a non-resident manufacturer along with a computer under any scheme
approved under the relevant policy of the Government of India [proviso to cl (vi)].
From the assessment year 2002–03, the term 'royalty' includes consideration for use or right to use any industrial, commercial or
scientific equipment, excluding the amounts referred to in s 44BB (ie hire charges for supply of plant and machinery used in
mineral oil concerns etc.) [Explanation 2(iva) to cl (vi)].
From the assessment year 2021-22, consideration for sale, distribution or exhibition of cinematographic films is no longer
excluded from definition of royalty. The intention of inclusion of cinematographic films under the definition of royalty is to have
parity with DTAA with other countries, as the DTAA of other countries do not provide for any such exclusion.

(b) Software Products/Copyrighted Articles—Consideration is Royalty.—

The failure to understand the difference between the sale or transfer of copyright or software on the one hand and the sale of
copyrighted articles or software products on the other resulted in extensive litigation. The Department took the stand that even
payments for purchase of software products or access to electronic databases would amount to royalty under s 9(1)(vi). A perusal
of the Copyright Act, 1957 shows the difference between copyright in a software programme and the consequences of
converting software programmes into products which are sold off-the-shelf. A standard accounting software is undoubtedly
based on a computer software programme but when the accounting package is sold as a CD or DVD or even downloaded
through the internet, there is no sale or transfer of any right in the software programme. It is only a sale of the software product.
In a sales tax case, canned software was held to be goods and liable to tax. Packaged or accounting software was held to be
goods and liable to sales tax. Therefore, the consideration paid for purchase of these software products cannot be treated as
royalty arising from the right to use software. Profits arising from the sale of these products will be business profits.78.
Where the payment is towards the purchase of hardware and not the software per se, it will not constitute royalty. 79.
Consideration for supply of software and updates enabling the use of hardware will not be considered as royalty.80. Similarly,
information supplied for installation of equipment is not royalty. 81. It is submitted that one should look at the dominant intention
of the contract.
It was held that the sale of software products that contain software solutions for "product life-cycle management" did not amount
to the transfer of a "right to use software". The software programme was in the nature of an intellectual property right and
purchasing the software product did not amount to transfer of any right in relation to the copyright.82. When software was not
prepared to meet the special needs of a customer and the software packages were supplied from outside India, the sale proceeds
could not be treated as royalty. The grant of an authority to use the licence did not mean that there was transfer in the copyright
embedded in the software. Mere transfer of computer software de hors any copyright associated with it would not come within
the definition of royalty under s 9(1)(vi). It was also held that provision of special purpose software was not fees for technical
services.83.
However, various courts have now held that payments for software programmes, i.e. off-the-shelf software, amounts to "royalty"
and not "business income".84. These judgments are now the law via a retrospective amendment introduced to s 9(1)(vi).
In a case where a non-resident gives the licence of a software to an Indian distributor, who can then distribute the software to the
clients, the payment made by the Indian distributor to the non-resident would be taxable in India as royalty.85. There is no
controversy regarding this, since the Indian distributor is being given the right to use the copyright to make further copies and
trade in the same. This is different from a case where the Indian buyer is only given a copyrighted article. Likewise, a payment
made for the purchase of software to be resold in the Indian market is not royalty.86. The opposite view taken by the Karnataka
High Court87. is a solitary, contrary view and clearly incorrect. The judgment dealt with a batch of about 100 cases relating to
software, although all did not deal with purchase and resale of software. Without segregating types of cases, the High Court
passed a comprehensive order holding that there was a "transfer" of right to use software and this would be royalty. It is
submitted that the decision is clearly erroneous and, unfortunately, it was followed in a number of other cases, compounding the
error. All these cases are now pending as a batch before the Supreme Court.
Similarly, where payment is made for pre-packaged software, this will not constitute royalty, as what is received is a copyrighted
article.88. However, the Madras High Court in Zylog Systems Ltd. v ITO ,89. has held that payment made for use of a business
solution software was royalty. It is submitted that this decision is per incuriam as the Court did not consider the decision of the
co-ordinate Bench of the High Court which decided the same issue in favour of the assessee.90. This apart, the High Court merely
confirmed the order of the Tribunal and followed the decision of the Karnataka High Court, 91. and did not consider the decisions
of other High Courts which have decided similar issues in favour of the assessee. On both counts, this decision is erroneous and
should not be considered as a precedent.
It is submitted that sales of software products often refer to the expression "licenced user". The practice of using the expression
"licenced user" is because of the peculiar nature of software and the ease with which it can be pirated. The sale of software
products is often coupled with a licence that limits the rights of a purchaser of the product. He gets no right in the software but
can only use the software product. In fact, s 52(1)(aa) of the Copyright Act permits only copies to be made as a backup or to

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utilize the computer programme for the purpose for which it was supplied. Almost all agreements do not grant any right in the
software programme; on the contrary, they actually impose a restriction or prohibition on the use of the software product. Thus, a
purchaser of an accounting package cannot make multiple copies and is not entitled to licence it or lease it further. Similarly, the
purchase of musical or film CDs or DVDs do not convey the right to make further copies or otherwise commercially exploit them.
The term "licence" in an End-user Licence Agreement (EULA) also refers to the licence of the article and not the licence of the
software itself. The AAR, rightly pointed out that when the agreement did not contain any clause, transferring the underlying
technical knowledge that had gone into developing the software, the ownership of the copyright embedded in the software
remained with the owner, notwithstanding the grant of authority to use the licence on a non-exclusive, non-transferrable basis.92.
The Delhi High Court, after analyzing the provisions of the Copyright Act, has held that s 14(1) talks of sale or rental of a "copy".
The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign
it, divesting itself of the title, implying that it has divested itself of all the rights under s 14 of the Copyright Act. This would mean
an outright sale of the copyright or an assignment under s 18 of the Act. Section 16 of the Copyright Act enacts that there
cannot be any other kind of right termed as "copyright".1. The Court also criticised the flawed appreciation of a copyright licence
by the Revenue. In an earlier decision, the Delhi High Court had held that, in order to qualify as royalty payment, it is necessary to
establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic
or scientific work. In order to treat the consideration paid by the licensee as royalty, it is to be established that the licensee, by
making such payment, obtains all or any of the copyright rights of such literary work. Just because one has the copyrighted
article, it does not follow that one also has the copyright in it. Copyright, or even right to use copyright, is distinguishable from a
copyrighted article. This sale consideration is for the purchase of goods and is not royalty.2. It is submitted that the purchase of a
book gives ownership of the book, which is the copyrighted article, but not the "copyright" in the book. It is for this reason that a
person who buys a book does not get the right to make copies of the whole or part of the book and this condition will apply
even to a person who may purchase the book second hand.
For a detailed discussion on the issue, the undernoted commentaries may be referred to.3. In these commentaries, it is made clear
that, in case of a grant of license to use software, it is not the intellectual property of the software that is licensed or sold, but
rather a product made with the use of intellectual property.
It is unfortunate that this issue is still not settled and all the cases are still pending in the Supreme Court. This has adversely
impacted the growth of the software industry.

(c) Imparting of Information/Commercial Knowledge.—

The assessee purchased data on the carbon graphite electrodes industry published in the form of a monthly compilation. This
information was available in the public domain but was collated, arranged and delivered in the monthly format. This could not be
treated as the imparting of technical/industrial/commercial or scientific knowledge, experience or skill under cl (iv) of Explanation 2
to s 9(1)(vi). Payments made for obtaining information about any industry or commercial venture cannot be treated as a royalty.4.
Payments for Business Information Reports (BIR) prepared by Dun and Brandstreet was not royalty or fees for technical service.
The purchase of these reports was akin to the purchase of a book and did not involve transfer of intellectual property. The
information in every BIR was available in the public domain but was sold after being collected and compiled. The price paid for
supply of information electronically could not be treated as royalty or fees for technical services.5.
The subscription fees for access to database did not amount to "use of" or "right to use" copyright of a literary or scientific work.
It also did not amount to payment for information concerning industrial, commercial or scientific experience.6. However, providing
customised social media monitoring and analytics to clients for a subscription fee was held to be royalty.7.

(d) Amendments made to Nullify the above Position.—

Explanations 4, 5 and 6 to s 9(1)(vi) were inserted by Finance Act, 2012 with retrospective effect from June 1, 1976 in s 9(1)(vi).
These amendments were introduced to nullify the under noted cases which held in favour of the assessee.8. Explanation 4 seeks
to ensure that licensing of software amounts to transfer and even downloading of software will amount to a transfer. It destroys
the distinction between the transfer of copyright and a sale of copyrighted article. In many cases, a licence is given to use
computer software, which gives only the right to use and does not transfer any right. Now, even a mere licence will now be
treated as royalty falling within s 9(1)(vi). Explanation 5 creates a legal fiction with regard to the meaning of the word "royalty".
Once consideration is paid for any right, property or information, it will be included in the definition of royalty whether or not, cll
(a), (b), (c) of that Explanation are satisfied. Hence, when an Indian accesses a foreign database, irrespective of where the database
is located, the income from the payment for such access would be taxable in India as "royalty". These amendments will not apply if
the assessee has a recourse to the DTAA.9.
Finally, Explanation 6 defines "process" and shockingly includes transmission by satellites. The word "process" is used in cll (i) and
(iii) of Explanation 2 to s 9(1)(vi). The consequence is that payment for use of a satellite will amount to royalty, irrespective of the
fact that the person who hires transponder space on the satellite knows nothing of the process by which such transformer works
or is not in control of the transponder in any manner whatsoever. The Explanation leads to absurd consequences which had

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become a standard feature of several provisions of the Act.

In a memorandum to the Finance Bill, 2012, it is stated that the need to insert is on account of conflicting decisions of various
courts in respect of income in the nature of royalty. The memorandum states that "some judicial decisions have interpreted this
definition in a manner which has raised doubts as to whether consideration for use of computer software is royalty or not;
whether the right, property or information has to be used directly by the payer or is to be located in India or control or
possession of it has to be with the payer. Similarly, doubts have been raised regarding the meaning of the term "processed."
It is submitted that Explanation 4 will apply only to cll (i) and (v) of Explanation (ii), since those are the only two clauses that use
the term "transfer of all or any rights". Further, Explanation 5 refers to "right, property or information". The term "property",
although otherwise wide in import, only refers to what is covered in cll (i), (ii) and (iii) under the expression "similar property".
Hence, the observation of the Delhi High Court in Asia Satellite10. regarding the requirement of possession or control of the
"equipment" under cl (iva) survives these amendments. It must be noted that Explanation 6, which seeks to nullify Asia Satellite,
only does so on the issue of whether the "process" includes the transmission by way of satellite.
It is submitted that any change in the domestic law would not automatically result in a change in law in respect of taxability of a
transaction or service under the terms of the DTAA.11.

(e) Fees for Technical Services.—

The expression "service" could not be construed in the abstract and general sense but in the narrower sense, as circumscribed by
the expressions 'managerial service' and 'consultancy service' would have reference to only technical service rendered by humans.
It would not include any service provided by machines or robots. The inter-connect charges/port access charges could not be
regarded as fees for technical services.12.
The term 'fees for technical services' also referred to as "FTS" could only be meant to cover such technical assistance as it is
capable of being provided by way of service for a fee, having regard to the fact that the term is required to be understood in the
context in which it is used; in cl (vii), it contemplates rendering of a 'service' to the payer of the fee, and cannot include providing
cellular mobile telephone facility,13. or internet facility14. to subscribers.
Clauses (vii)(b) and (c) use the expression 'fees for services utilised' in India and not 'fees for services rendered' in India and
accordingly if the fees are paid for the services utilised by the Indian company in its business carried on by it in India, irrespective
of the place where the services are rendered, the amount of fees would be deemed to accrue or arise in India.15. Fees for technical
services would continue to be taxable under s 9(1)(vii) and will not stand excluded merely because such fees accrue or arise out of
any business connection. Such fees would not be taxed under s 9(1)(i).16.
The payment of consultancy fees and commission and reimbursement of legal expenses incurred abroad were all held to fall
within the category for fees for technical service because the services were utilized in a business carried on in India. The AAR held
that unless the services are utilized in business or profession carried on by a resident outside India or for the purpose of making
or earning income from a source outside India, all fees paid by the resident to a non-resident would be taxable if the services were
utilized in India.17. Similarly, analysis of samples and ores was done in Canada and consideration was also paid in Canada. Once
again, since the test reports were utilized in India, they would be taxable here and the payment payable was income accruing or
arising in India and liable for deduction of tax at source.18. Where income was by way of a wet-lease of aircrafts to a foreign
company, the expenses incurred towards maintenance and repairs of the aircraft for the purpose of earning an income abroad fall
under the exception provided in s 9(1)(vii)(b). Therefore, no tax is to be deducted on such payments as fees for technical
services.19.
When production of programmes for telecasting has been specifically characterized as 'work' under s 194C, it cannot then be
characterized as 'fees for technical services' under this clause.20. It is trite law that a specific provision will override a general
provision.
Technical services rendered by the parent US company to its Indian subsidiary on cost basis are taxable under s 9(1)(vii) even if
there is no profit element.21. Where an Indian parent sub-contracts work to be performed in Australia to its Australian subsidiary,
the AAR held that the payments made to the subsidiary amounted to fees for technical services in India.22. This ruling fails to note
the language of s 9(1)(vii)(b) which makes an exception in cases where the services are used by the recipient outside India.
However, when an Indian subsidiary sub-contracts work for Indian clients in a foreign country to its parent, the recipient of the
service is the Indian company, which is using it to service its Indian clients. Hence, the exception in s 9(1)(vii)(b) will not apply.23. In
the same manner, consultancy service rendered in China but used in India was taxable in India.24.
Fees for technical services includes consideration for the rendering of services by an assessee through its employees,25. but not
where the payment is made to the foreign employees by way of remuneration for the services rendered in India.26. Similarly,
services provided by agents appointed by Indian assessees who had their offices situated in a foreign country and did not provide
any services to assessees in India, was not taxable in India.27. Payment for services related to identification of products and
advising on competitive pricing is not a 'technical service'.28. Service fee payable for promotion of goods outside India, is not fees
for technical services.29. Similarly, payment made to a non-resident agent for procuring orders from overseas buyers is

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commission simpliciter and cannot be characterized as fees for technical service.30. Payment made outside India for agency
services to issue global depository receipts is not fees for technical services.31. Appointment of sales executives by an Indian
branch of a foreign company in Sri Lanka for marketing service was not taxable in India as FTS, because the services were
rendered outside India.32.
Fees paid for availing market development support services, area services and global services are not fees for technical services
under s 9(1)(vii). They are also not "fees for included services" under the DTAA between India and the UK.33.
The component of technical or consultancy services incidental to the execution of the project cannot not be segregated and
brought within the scope of 'fees for technical services' under the DTAA between India and the Federal Republic of Germany. If
technical personnel are provided, it does not follow that the fees paid are for technical services.34. When employees of a non-
resident are seconded to work in India under the direct control and supervision of an Indian resident, the fees paid to the non-
resident by the Indian company would still fall under fees for technical services.35. Fees for legal advice, tax advice and information
technology advice falls within the ambit of the term "consultancy".36. Amounts paid towards evaluation of certain resources and
feasibility studies for certain projects to be carried out in India would fall under the head of "technical services".37. However, the
payment for purchase of bandwidth is not fees for technical service.38.
Where the technical services are rendered by a non-resident who has not undertaken any construction, assembly, mining or like
project in India, but has undertaken merely to supervise the erection, commissioning, and start up of the plant, the payment for
such supervisory services is taxable under cl (vii) because the exclusionary clause contained in Explanation 2 does not apply in
such a case.39. Similarly the fees paid to assist in achieving desired quality and optimum production are taxable.40. A contract for
mud-testing,41. or a contract for collecting seismic data,42. or analysing such seismic data,43. even though in relation to
prospecting for mineral oils, would not come under the expression "mining", and would be taxable as fees for technical services.
But rendering of services by two foreigners for just 15 days to set up a plant in India under an agreement for transfer of technical
know-how was held not to be covered by cl (vii).44.
Amounts paid to an agent to handle paper work with a public works department and to a liaison agent for soliciting business in a
foreign territory for an Indian assessee is not a consultancy service within the meaning of fees for technical services.45. The court
also observed that since the income received by the agents could only be classified under the provisions of DTAA between India
and UAE, which provides that income shall be taxable only in the State/Country in which the recipient is a resident, the assessee
was not liable to deduct TDS on the remittances made to such agents.
Where a foreign company rendered services as a financial adviser to an Indian company in raising finances for its power
generating business and was paid a 'success fee' based on the total debt financing, it was held that the success fee was a fee for
technical or consultancy services and hence taxable under cl (vii).46. On appeal, this was referred to a Larger Bench which went
into the scope of Article 245(2) and the extent of the power of Parliament to make laws with respect to extra-territorial aspects or
causes. In a highly unsatisfactory judgment, the Larger Bench held that Parliament would have the legislative competence to
enact laws so long as there is a real connection between the extra territorial aspects or causes and something that has an impact,
effect or consequence in India. Several unnecessary paragraphs were devoted to the nature of power of Parliament and
"constitutional topological spaces". It is submitted that a critical analysis of the judgment is outside the scope of this
commentary.47.
The main contract was for supply of sophisticated capital equipment and a separate contract was entered into for the provision of
technical services for erection, commissioning and start up of the equipment. The separate contract was treated as part of the
main contract for supply of equipment and the payment for supervision, erection, commissioning was not to be treated as fees
for technical services. Such payments were also exempt under Explanation 2 to s 9(1)(vii). Significantly, the separate contract was
called an agreement for technical services and, despite this nomenclature, the consideration was held not to be falling within the
category of fees for technical services.48. Contract for erection and commissioning including welding and transportation, is not for
professional or technical services as defined in Explanation 2 to s 9(1)(vii).49.
The business of conducting seismic surveys and providing services in connection with oil and gas exploration will fall under s 44BB
and not under s 9(1)(vii).50. So would services for removing oil drilling rigs from one site to another.51.
The Supreme Court confirmed that non-residents and foreign companies receiving payments from India under a contract for
providing services in connection with prospecting, extraction or production of mineral oil are not chargeable to tax as fees for
technical services (FTS) but are taxable under s 44BB.52. It was observed that if the various services rendered are directly
associated or inextricably connected with prospecting, extraction or production of mineral oil, it will be included within the
expression 'mining' in Explanation 2 to s 9 (1)(vii). Consequently, such payment will not be FTS. To come to this conclusion, the
Supreme Court relied on the definition of 'mines' and 'minerals' in the Mines Act 1952, Oil Fields (Development and Regulation)
Act 1948, and Mines and Minerals (Development and Regulation) Act 1957.53. Consideration for mobilization and demobilization
of single point mooring is neither royalty nor fees for technical services.54.
The German company undertook electrical contract work and, by a separate agreement, received payments for preparing
drawings and documents. These were fees for technical services and taxable in India.55.
Standard Facility – Not Fees for Technical Services.—

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Explanation 2, which defines fees for technical services, encompasses three kinds of services being 'managerial, technical or
consultancy'. If the services so provided do not have any attributes, such as being customized or special or exclusive, the same will
not be fees for technical services. "Technical services" like "Managerial and Consultancy service" denote services that cater to the
special needs of a customer or user as may be felt necessary and the making of the same available by the service provider. It is
the above feature that would distinguish or identify a service provided from a facility offered. While the former is special and
exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in
distinction to the former. 56. Such a facility is nothing but a standard facility which is offered to all consumers, such as an ATM
facility by a bank, internet facility by telecom operator, transport ticketing services by an online service provider, consultancy
service by a travel agent and so on and so forth. Therefore, such 'standard facility' by whatever name called will be outside the
scope of the definition of fees for technical services.
Transaction charges paid by a member of the BSE for transactions of sale and purchase of shares is not fees for technical
services.57. The Supreme Court also held that common services provided by a stock exchange fail to satisfy the test of 'technical
services', since they do not cater to the special needs of the consumer as required.58. Payment made for content delivery service is
not fees for technical service.59. Following the earlier decision of the Supreme Court in Kotak, it was held that payment for the
common facility of using an IT system provided to all agents of the assessee is not towards fees for technical services.60.
To the contrary, payment for use of interface processors, which, according to the AAR, used a patented and secret technology,
was held to be payment for use of a secret formula and was, thus, royalty under the Act.61. It is submitted that the ruling of the
AAR, is incorrect. Payment for usage of standard facility offered by a service provider should not be treated as royalty, because
the payment is not for the use or the right to use of 'formula', but for services of a payment gateway which authorises credit card
transactions. Further, the AAR also bifurcated the service fee as partly taxable as royalty and partly taxable as fees for technical
services. This was, however, not taxable in India because of the 'make available'62. clause in DTAA, and some part, being standard
facility, was not taxable. 63. It is submitted that the bifurcation of the service fee is erroneous, and the dominant intention of the
transaction ought to be looked at.
Transmission charges paid to a transmission company in consideration of availing the benefits of standard technical facility, i.e.,
transmission system network for the purpose of transmission of electricity from generation point to distribution point and merely
making available the benefits of its sophisticated transmission system network to the applicant-company, is not FTS. It was also
held that transmission of electricity is not "technical service" as there is no human touch or effort and the term "technical" has to
be read by applying the principle of noscitur a sociis with the term "managerial or consultancy".64.
Programme fee paid to an educational institution is not fees for technical services.65.

Make Available.—
In a few DTAAs between India and other countries, to tax payments for fees for technical services, it is also necessary to make
available the technical knowledge, experience, skill, know-how etc. to enable the person receiving the service to apply such
technology. 'Make available' is said to be satisfied if the technology, knowledge, or expertise can be applied independently by the
person who obtained the services.66.

(f) Fees for Technical Services.—

As regards tax-free royalties and technical fees, from assessment year 2003–04, if the payment to a foreign company of royalty or
fees for technical services pursuant to an agreement made on or after June 1, 2002 is stipulated to be free of Indian income tax,
for computing the income of the foreign company, the tax so paid will have to be grossed by applying the principle of 'multiple
grossing up' by calculating tax on tax. [See ss 10(6A) and 195A).] The concept of 'grossing up' was considered in the
undermentioned cases.67.
In the case of a composite contract for supply of equipment and for providing technical services, if the terms and conditions are
demarcated, the consideration for technical services would remain independent of the consideration for supply of equipment and
would be taxable as fees for technical services68. and in the absence of such demarcation, an estimated allocation would be
justified.69.

31. Composite Contract—Allocation or Apportionment.—

When a total contract price was paid that covered all stages from design to commissioning, the amount payable for design and
engineering could not be taxed either as royalty or fees for technical services under s 9(1)(vi) or (vii).70. On facts, which have not
been clearly set out, 40 per cent. of the fees paid were held to have accrued in India.71. However, the AAR has held that since in
the Vodafone case the Supreme Court held that s 9 was a "look at" and not a "look through" provision, the contract, even if
divisible, could not be divided, and that the entire sum payable for a turnkey contract must be taxable under s 9.72.

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32. Taxability and Territorial Nexus—The Uncertainty Continues.—

The recent developments in the law in relation to territorial nexus need to be considered further. First, one may consider nexus
requirements in relation to sub-cll (vi) and (vii) of s 9(1). In Ishikawajima, the Supreme Court imposed a territorial nexus
requirement in the context of sub-cl (vii) by holding that the services must have been both "rendered" and "utilized" in India. A
serious mistake in this decision was that the Supreme Court referred to and interpreted s 9(1)(vii)(c) when the applicable clause
was s 9(1)(vii)(b). This renders the decision per incuriam but need not be discussed further as the Ishikawajima decision is no
longer good law after two successive amendments in 2007 and 2010.73. An Explanation was added by the Finance Act, 2007, with
retrospective effect from 1.6.76, providing that income would be deemed to accrue or arise whether or not the non-resident has
a residence or place of business or business connection in India. The Bombay High Court in Siemens74. held that this amendment
did away with the ratio of Ishikawajima's case, but held in Clifford Chance that it did not.75. Subsequently, the Authority for
Advance Rulings in Worley Parsons distinguished Ishikawajima, but without noticing the amendment to the Finance Act, 2007.76.
The issue was then considered by the Karnataka High Court,77. where the assessee relied on Ishikawajima and Clifford Chance.
The Revenue argued that the Memorandum to the Finance Act, 2007 clearly indicated that the purpose of the amendment was
to negate the effect of Ishikawajima, and relied on Siemens to support this proposition. The High Court observed that the 2007
amendment only did away with the criteria of "place of business, residence or business connection" and not with the decision in
Ishikawajima in its entirety. In order to get over these decisions, the Finance Act, 2010 further amended the Explanation to the
section with retrospective effect from 1.6.76. The retrospective amendment to the Explanation to s 9 makes it abundantly clear
that the 'render and utilise' formula of Ishikawajima is no longer good law. The new Explanation virtually makes any payment to a
non-resident taxable in India. The requirement of residence or place of business on rendering of services in India has become
irrelevant. The validity of such a provision is seriously in doubt because the Explanation virtually amounts to extra territorial
legislation which is not permissible. Even if no service is rendered in India, the amount received by a non-resident is still taxable as
royalty or fees for technical services. Thus, the mere fact that the amount may come within the wide definition of royalty or fees
for technical services would be sufficient to make it income deemed to be accruing or arising in India. The deeming fiction is
attracted by the mere fact that the recipient of the payment is a non-resident.
Besides sub-clauses (vi) and (vii), nexus requirements may also have a significant impact on sub-cl (i). The withdrawal of Circular
No. 23 of 196978. had stated in the relevant part, "Section 9 does not seek to bring into the tax net the profits of a non-resident
which cannot reasonably be attributed to operations carried out in India." It is noteworthy that insofar as this principle is
applied to business connection under s 9(1)(i), the principle is seen in Explanation 1 to the Section itself, which states that with
respect to business connection, "in the case of a business of which all the operations are not carried out in India, the income of
the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably
attributable to the operations carried out in India…" Thus, the withdrawal of Circular No. 23 will not change the position in this
respect, as the Explanation to the section ensures that income arising through or from a business connection is chargeable only
to the extent that it can be attributed to operation in India. Circular No. 23 was withdrawn on the basis that "interpretation of
the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act,
1961 or the intention behind the issuance of the Circular." Circular No. 23 of 1969 was withdrawn by Circular No. 7 of 2009 and
is operative from October 22, 2009. However, assessments made prior to the new circular should be governed by the earlier
Circular No. 23 of 1969.79. A five judge bench of the Supreme Court has reaffirmed that territorial nexus is a sine qua non for the
constitutional validity of the section, but the issue of whether the section, as it stands is valid or not has not been decided.80. It
appears that the courts will either have to strike down the new Explanation (and thereby elevate the Ishikawajima formula to
constitutional status), or courts will have to insist on a factual "live link with the territory" to be shown in each case. This latter
option seems more in accordance with the decision of the Constitution bench, where the question of nexus was held to be not a
pure question of law, but a mixed question of law and fact. After the decision of the five-judge bench, the Supreme Court
observed that the exception provided in s 9(1)(vii)(b) is not overridden by the Explanation to s 9(2). For fees for technical services
(FTS) to be taxed in India, it is essential that the tax payer is resident in India and that the services are also utilized in India. The
logical corollary to this is that, where an Indian resident utilizes the services provided by the non-resident service provider for the
purpose of earning income from any source outside India, the payment for such services is not deemed to accrue or arise in India
and, hence, not taxable in India.81.
The question of territorial nexus has been considered in a few cases. An Australian company provided professional services to the
energy sector. A few of its employees visited India intermittently but it did not have any permanent establishment in India and
the bulk of the work was done in Australia. Certain activities were carried out in India which were by no means negligible. As the
work done in India was essentially to carry out the obligation under the contract, there was sufficient territorial nexus for the levy
of tax and the entire receipts were liable to be taxed. Splitting or apportioning was not permissible as there was a single
agreement covering only one type of work. Apportionment was possible only if the agreement had severable elements.82. Where
designs were delivered by a non-resident outside India to be used outside India, it was held that there was no taxability in
India.83.

33. Clause (viii): Income from Other Sources.—

Clause (viii) has been inserted by the Finance (No.2) Act, 2019 to tax gifts received by non-residents from Indian residents. This
clause comes into operation from July 5, 2019 and will apply to any sum of money paid by a person resident in India to a non-
resident.

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This clause will only apply to non-residents who receive a sum of money as a gift from an Indian resident. It is important to note
that s 9(1)(viii) only covers receipt of money and not property as income deemed to accrue or arise in India. Therefore, this clause
will apply to a non-resident only on receipt of money and not property as cl (viii) only refers to 'any sum of money' referred to in
s 2(24)(xviia). Section 9, being a deeming fiction, has to be construed strictly and will not apply to receipt of property by a non-
resident without consideration or as provided in s 56(2)(x).
This seems to be a case of faulty drafting and as the statute reads today, cl (viii) will include only 'any sum of money' received by a
non-resident until an amendment is made to include 'property'.

84. The words "or through or from any money lent at interest and brought into India in cash or in kind" have been omitted by the Finance Act, 1976
(66 of 1976), s 4(a) (w.e.f. 1-6-1976). See Circular No. 202, July 5, 1976, 105 ITR (St.) 17.
85. Explanation has been numbered as Explanation 1 thereof by the Finance Act, 2003 (32 of 2003), s 5 (w.e.f. 1-4-2004).
86. Subs., for "in the case of a business", by the Finance Act, 2020 (12 of 2020), s 5(a)(i) (w.e.f. 1-4-2022).
87. Proviso has been omitted by the Finance Act, 1964 (5 of 1964), s 5 (w.e.f. 1-4-1964), Circular No. 20D, July 7, 1964. Prior to its omission, the proviso
stood as follows:—
"Provided that the non-resident has no office or agency in India for this purpose and the goods are not subjected to any kind of manufacturing
process before being exported from India.".
88. Ins. by the Finance Act, 1983 (11 of 1983), s 4(a) (w.r.e.f. 1-4-1962). See Circular No. 372, December 8, 1983, 146 ITR (St.) 9.
89. Ins. by the Taxation Laws (Amendment) Act, 1984 (67 of 1984), s 3 (w.r.e.f. 1-4-1982). See Circular No. 397, October 16, 1984, 152 ITR (St.) 29.
90. Ins. by the Finance Act, 2016 (28 of 2016), s 5 (w.e.f. 1-4-2016). See Circular No. 3 of 2017, January 20, 2017, 391 ITR (St.) 253.
91. Explanation 2 and Explanation 3 have been inserted by the Finance Act, 2003 (32 of 2003), s 5 (w.e.f. 1-4-2004), Circular No. 7, September 5, 2003,
263 ITR (St.) 62.
92. Subs. by the Finance Act, 2018 (13 of 2018), s 4(I) (w.e.f. 1-4-2019), Circular No. 8 of 2018, December 26, 2018, 410 ITR (St.) 1, for the following
clause (a):—
'(a) has and habitually 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; or'
93. Ins. by the Finance Act, 2020 (12 of 2020), s 5(a)(ii) (w.e.f. 1-4-2022). Earlier, Explanation 2A which was inserted by the Finance Act, 2018 (13 of
2018), s 4(II) (w.e.f. 1-4-2019) and omitted by the Finance Act, 2020 (12 of 2020), s 5(a)(ii) (w.e.f. 1-4-2021), stood as follows:—
'Explanation 2A.––For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute
"business connection" in India and "significant economic presence" for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or
software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as
may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India
through digital means:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not,—

(i) the agreement for such transactions or activities in entered in India;

(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be
deemed to accrue or arise in India.'.

94. Ins. by the Finance Act, 2020 (12 of 2020), s 5(a)(iii) (w.e.f. 1-4-2021).
95. Ins. by the Finance Act, 2020 (12 of 2020), s 5(a)(iv) (w.e.f. 1-4-2022).
96. Explanation 4 and Explanation 5 have been inserted by the Finance Act, 2012 (23 of 2012), s 4(a) (w.r.e.f. 1-4-1962).
1. Ins. by the Finance Act, 2017 (7 of 2017), s 4(i) (w.r.e.f. 1-4-2012). See Circular No. 2 of 2018, February 15, 2018, 401 ITR (St.) 178.
2. Ins. by the Finance Act, 2017 (7 of 2017), s (ii) (w.r.e.f. 1-4-2015).
3. Ins. by the Finance Act, 2020 (12 of 2020), s 5(a)(v)(I) (w.e.f. 1-4-2020).
4. Ins. by the Finance Act, 2020 (12 of 2020), s 5(a)(v)(II) (w.e.f. 1-4-2020).
5. For text, see Appendix 143C.
6. Explanation 6 and Explanation 7, have newly been inserted by the Finance Act, 2015 (20 of 2015), s 5(A) (w.e.f. 1-4-2016). See Circular No. 19 of 2015,
November 27, 2015, 379 ITR (St.) 19.
7. Subs. by the Finance Act, 1999 (27 of 1999), s 5 (w.e.f. 1-4-2000), Circular No. 779, September 14, 1999, 240 ITR (St.) 3, for the following:—
'a[Explanation.—For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in
India shall be regarded as income earned in India;]'.
——————————————
a. Ins. by the Finance Act, 1983 (11 of 1983), s 4(b) (w.r.e.f. 1-4-1979). See Circular No. 372, December 8, 1983, 146 ITR (St.) 9.
8. Clauses (v), (vi) and (vii) have been inserted by the Finance Act, 1976 (66 of 1976), s 4(b) (w.e.f. 1-6-1976).
9. Ins. by the Finance Act, 2015 (20 of 2015), s 5(B) (w.e.f. 1-4-2016). See Circular No. 19 of 2015, November 27, 2015, 379 ITR (St.) 19.
10. Clauses (v), (vi) and (vii) have been inserted by the Finance Act, 1976 (66 of 1976), s 4(b) (w.e.f. 1-6-1976).
11. Ins. by the Finance (No. 2) Act, 1991 (49 of 1991), s 4(a) (w.r.e.f. 1-4-1991).

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12. Subs., for "foregoing proviso", by the Finance (No. 2) Act, 1991 (49 of 1991), s 4 (w.r.e.f. 1-4-1991).
13. Subs., for "Income-tax Officer", by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988).
14. Ins. by the Finance Act, 2001 (14 of 2001), s 4(i) (w.e.f. 1-4-2002). See Circular No. 14, December 12, 2001, 252 ITR (St.) 65.
15. The words ", but not including consideration for the sale, distribution or exhibition of cinematographic films" have been omitted by the Finance
Act, 2020 (12 of 2020), s 5(b) (w.e.f. 1-4-2021).
16. Subs., for "sub-clauses (i) to (v)", by the Finance Act, 2001 (14 of 2001), s 4(ii) (w.e.f. 1-4-2002). See Circular No. 14, December 12, 2001, 252 ITR (St.)
65.
17. Subs. by the Finance Act, 2000 (10 of 2000), s 4 (w.e.f. 1-4-2001), Circular No. 794, August 9, 2000, 245 ITR (St.) 21, for the following:—
'a[Explanation 3.—For the purposes of this clause, the expression "computer software" shall have the meaning assigned to it in clause (b) of the
Explanation to section 80HHE:]'.
——————————————
a. Ins. by the Finance (No. 2) Act, 1991 (49 of 1991), s 4(c) (w.r.e.f. 1-4-1991).
18. Ins. by the Finance Act, 2012 (23 of 2012), s 4(b) (w.r.e.f. 1-6-1976).
19. Ins. by the Finance Act, 1976 (66 of 1976), s 4(b) (w.e.f. 1-6-1976).
20. Ins. by the Finance (No. 2) Act, 1977 (29 of 1977), s 4(a) (w.e.f. 1-4-1977). See Circular No. 229, August 9, 1977, 111 ITR (St.) 9.
21. Ins. by the Finance (No. 2) Act, 1977 (29 of 1977), s 4(b) (w.e.f. 1-4-1977). See Circular No. 229, August 9, 1977, 111 ITR (St.) 9.
22. The then Explanation has been numbered as "Explanation 2" by the Finance (No. 2) Act, 1977 (29 of 1977), s 4(b) (w.e.f. 1-4-1977).
23. Ins. by the Finance (No. 2) Act, 2019 (23 of 2019), s 4 (w.e.f. 1-4-2020).
24. For text, see Appendix 87.
25. Subs. by the Finance Act, 2010 (14 of 2010), s 4 (w.r.e.f. 1-6-1976), Circular No. 1, April 6, 2011, 333 ITR (St.) 7, for the following:—
'a[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in
India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-
resident has a residence or place of business or business connection in India.]'.
——————————————
a. Ins. by the Finance Act, 2007 (22 of 2007), s 5 (w.r.e.f. 1-6-1976), Circular No. 3, March 12, 2008, 299 ITR (St.) 8.
26. CIT v Bhogilal 25 ITR 50 (SC).
27. CIT v Bhanjee 1 ITC 147.
28. Available at http://www.oecd.org/dataoecd/43/57/42219418.pdf.
29. Available at http://www.un.org/esa/ffd/documents/DoubleTaxation.pdf.
30. UOI v Azadi Bachao Andolan 263 ITR 706 (SC), (2004) 10 SCC 1 [LNIND 2003 SC 853] , (2003) 184 CTR (SC) 450.
31. Asia Satellite Telecommunications Co. Ltd. v DIT 332 ITR 340.
32. Kevin Holmes, International Tax Policy and Double Tax Treaties, IBFD Publications: Amsterdam, 2007, pp. 75-76.
33. P No 28 of 1999 238 ITR 296 (AAR).
34. CIT v PVAL Kulandagan Chettiar 267 ITR 654, (2004) 189 CTR SC 193, (2004) 6 SCC 235 [LNIND 2004 SC 656] .
35. CIT v Vr S.R.M. Firm 208 ITR 400, (1994) 120 CTR (Mad) 427.
36. Airports Authority of India In re, 273 ITR 437 (AAR).
37. P No 10 of 1996 224 ITR 473 (AAR).
38. XYZ/ABC Equity Fund, In re, 250 ITR 194 (AAR).
39. P No 13 of 1995, In re, 228 ITR 487 (AAR).
40. Tekniskil (Sendirian) Bhd. v CIT 222 ITR 551 (AAR).
41. P No. 24 of 1996, In re, 237 ITR 798 (AAR).
42. Sutron Corpn. In re, 268 ITR 156 (AAR).
43. Dell International Services (India) Pvt. Ltd. In re, 305 ITR 37 (AAR).
44. CIT v Vishakhapatnam Port Trust 144 ITR 146, (1984) 38 CTR (AP) 1 .
45. P No. 8 of 1995 In re, 223 ITR 416 (AAR).
46. Ishikawajma-Harima Heavy Industries Ltd. v DIT 288 ITR 408, AIR 2007 SC 929 [LNIND 2007 SC 10] , (2007) 3 SCC 481 [LNIND 2007 SC 10] . This
decision is no longer good law after the amendments to s 9(1).
47. Al Nisr Publishing, In re, 239 ITR 879 (AAR).
48. Circular No. 5 of 2004, September 28, 2004, 270 ITR (St.) 31.
49. CIT v Aggarwal 56 ITR 20, 24 (SC); Performing Right Soc v CIT 106 ITR 11, 22 (SC); CIT v Little 18 ITR 849, 858, 873. See also other cases cited under
'Clause (a) of Explanation does not apply where profits actually accrue or are received in India'.
50. CIT v Oriental 137 ITR 777, 793–94.
51. Anglo-French Textile v CIT 25 ITR 27 (SC); Turner Morrison v CIT 23 ITR 152 (SC); Hira Mills v ITO 14 ITR 417.
52. In re SKF Boilers and Dryers Pvt. Ltd. 343 ITR 385. Contra CIT v Eon Technology P. Ltd . 343 ITR 366 (however, relying on Circular No. 786 dated
February 7, 2000 which was withdrawn by Circular No. 7 of 2009 dated October 22, 2009.)
53. Bonython v Commonwealth of Australia [1951] A.C. 201 , 219.
54. Hira Mills v ITO 14 ITR 417, 424; Anglo-French Textile v CIT 18 ITR 888, 895, on appeal 23 ITR 101 (SC).
55. Carborandum and Co. v CIT 108 ITR 335 (SC), AIR 1977 SC 1259 [LNIND 1977 SC 174] , (1977) 2 SCC 862 [LNIND 1977 SC 174] .
56. CIT v Currimbhoy 3 ITR 395, 400 (PC).
57. Netherlands Steam Navigation v CIT 74 ITR 72 (SC); Ellerman v CIT 82 ITR 913 (SC); CIT v Simon Carves 105 ITR 212 (SC); CIT v Indian Textile
Engineers 141 ITR 69; CIT v Shinwa 165 ITR 270; Webb v CIT 18 ITR 33.
58. Wallace v CIT 16 ITR 240, 246 (PC).
59. Wadia v CIT 17 ITR 63, 71, 73 (FC); Caltex v CIT 21 ITR 278.
60. Abdul Azeez v CIT 33 ITR 154.
61. First proviso to Explanation 2 [s 9(1)(i)]. See also second proviso to the same explanation.
62. BEPS Action Plan 7 is also implemented in Article 12 of the MLI to which India is also a signatory.
63. Gutal Trading In re, 278 ITR 643 (AAR).
64. CIT v Nike Inc. [2013] 1 ITR – OL 274; DIT v Tesco International Sourcing Ltd. 373 ITR 421; Columbia Sportswear Company v DIT [2017] 9 ITR-OL 358.
65. Nortel Networks India International Inc. v DIT 386 ITR 353.
66. Lakshminarayan Ram Gopal and Sons Ltd. v Govt. of Hyderabad 25 ITR 449, AIR 1954 SC 364 [LNIND 1954 SC 57] , [1955] 1 SCR 393 [LNIND 1954 SC
57] .
67. In Re AAR No. 542 of 2001, In re, 274 ITR 501 (AAR). See also ABC Ltd., In re, 289 ITR 438 (AAR); In re, Spahi Projects, 315 ITR 374 (AAR).
68. Proposal for Equalization Levy on Specified Transactions, February, 2016. The report is accessible at the following link:
https://www.incometaxindia.gov.in/News/Report-of-Committee-on-Taxation-of-e-Commerce-Feb-2016.pdf. Last accessed on May 2020..
69. CIT v Aggarwal 56 ITR 20, 24 (SC); Hira Mills v ITO 14 ITR 417, 428; Bangalore Woollen v CIT 18 ITR 423, 451–52; Abdullabhai v CIT 22 ITR 241; Great
Lakes v CIT 202 ITR 64, 67; CIT v Schreiner 182 ITR 429.
70. CIT v National Mutual Life Assn. 1 ITR 350, 356, 361, reversed on another point in National Mutual Life Assn. v CIT 4 ITR 44 (PC); Hira Mills v ITO 14

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ITR 417, 428; Bangalore Woollen v CIT 18 ITR 423, 433.

71. CIT v Currimbhoy Ebrahim & Sons Ltd. 3 ITR 395; Bangalore Woollen v CIT 18 ITR 423, 433, 453.
72. CIT v Aggarwal & Co 56 ITR 20, 24, 28, followed in CIT v TI&M Sales 166 ITR 93 (SC); GVK Industries v ITO 228 ITR 564.
73. See also Anglo-French Textile v CIT 23 ITR 101, 108 (SC); CIT v Currimbhoy 3 ITR 395 (PC); CIT v Visalakshi 5 ITR 448; CIT v Metro 7 ITR 176;
Bangalore Woollen v CIT 18 ITR 423, 435, 451; Abudullabhi v CIT 22 ITR 241; Damodara v CIT 26 ITR 650; Bikaner Textile v CIT 58 ITR 169, 175–76, CIT v
Blackwood 76 ITR 107; CIT v Bharat Fritz 118 ITR 1018; CIT v New Consolidated Gold Fields 143 ITR 599, affirmed on another ground in 257 ITR 770 (SC);
CIT v Assam Tea 167 ITR 215.
74. See also Premnath v CIT 159 ITR 575; CIT v Schreiner 182 ITR 429.
75. Sutron Corporation, In re, 268 ITR 156 (AAR).
76. Rogers v Sec of State 1 ITC 363; CIT v Steel 2 ITC 119; CIT v Bhanjee 1 ITC 147; Re Nandlal 7 ITR 452 (branch of foreign manufacturing company
established in India by company's managing agents); Motor Union Ins. v CIT 13 ITR 272.
77. Rogers v Sec of State 1 ITC 363; CIT v Steel 2 ITC 119.
78. Abdullabhai v CIT 22 ITR 241.
79. Anglo-French Textile v CIT 23 ITR 101 (SC); Webb v CIT 18 ITR 33; Bangalore Woollen v CIT 18 ITR 423; CIT v Mohammed Oosman 5 ITR 657;
Singareni v CIT 21 ITR 375; Abdullabhai v CIT 22 ITR 241; Re Union Jute 27 ITR 138; Abdul Azeez v CIT 33 ITR 154; Subramania v CIT 46 ITR 724; Biyani v
CIT 120 ITR 887; Blue Star Engg. Co. (Bombay) v CIT 73 ITR 283. Cf. CIT v Steel 19 ITR 435; CIT v Jiyajeerao 118 ITR 72 (stray purchases in India). See
further under 'Purchase of goods in India for export'.
80. CIT v Remington 5 ITC 177 (PC). The board has issued circular no 23 dated July 23, 1969 setting out circumstances in which profit on sale of goods
by non-resident company to its Indian subsidiary will not be deemed to have accrued in India under this section: CIT v Gulf Oil 108 ITR 874; CIT v Ruti
Machinery 243 ITR 442. See also Re ARA No P-8 of 1995 223 ITR 416 (consultancy services).
81. CIT v Bombay Trust Corpn . 4 ITC 312 (PC); CIT v Bombay Trust Corpn . 4 ITR 323 (PC); Bank of Chettinad v CIT 8 ITR 522 (PC); Oriental v CIT 7 ITC
211.
82. CIT v Metro 7 ITR 176.
83. CIT v National Mutual Life Assn. 1 ITR 350, 361, reversed on another point in National Mutual Life Assce. v CIT 4 ITR 44 (PC); Bangalore Woollen v
CIT 18 ITR 423, 433.
84. Bangalore Woollen v CIT 18 ITR 423, 453; Hira Mills v ITO 14 ITR 417, 428; Bikaner Textile v CIT 58 ITR 169, 176.
85. CIT v Aggarwal 56 ITR 20 (SC); Hira Mills v ITO 14 ITR 417, 430; CIT v Bhumraddi 33 ITR 82.
86. Jethabhai v CIT 20 ITR 331.
87. CIT v Hindustan Shipyard 109 ITR 158; CIT v Fried Krupp 128 ITR 27; CIT v Visakhapatnam Port Trust 144 ITR 146; CIT v Energomach 232 ITR 448; CIT
v Navabharat 244 ITR 261. Cf. Bharat Heavy Plate v CIT 119 ITR 986; CIT v Yamatake 210 ITR 470 (absence fee); and p 405, n 71.
88. Linde AG. Linde Engineering Division v DDIT 365 ITR 1, following Ishikawajima-Harima Heavy Industries Ltd. v DIT 288 ITR 408 (SC).
89. Soho House v CIT 31 ITR 727.
90. CIT v Evans 36 ITR 418.
91. Barendra Prasad Ray v ITO 129 ITR 295.
92. Under s 9(1) income must arise directly or indirectly, through or from any business connection in India. Under s 163, under agent must have some
connection or concern with income sought to be assessed'.
93. CIT v Shah 135 ITR 146; Thomas v CIT 161 ITR 21.
94. Barendra Prasad Ray v ITO 129 ITR 295, p. 305.
95. See p 30, n 51.
96. Booz and Co. (Australia) P. Ltd. In Re., 362 ITR 134, 158 (AAR).
97. CIT v R. D. Aggarwal and Co. 56 ITR 20 (SC); Anglo-French Textile Co. Ltd. v CIT 23 ITR 101 (SC).
1. Grainger v Gough 3 TC 462, 467 (HL); Erichsen v Last 4 TC 422 (CA); Smidth v Greenwood 8 TC 193 (HL); Wilcock v Pinto 9 TC 111 (CA); Maclaine v
Eccott 10 TC 481 (HL); Muller v Lethem 13 TC 126 (HL); Belfour v Mace 13 TC 539 (CA); Firestone v Lewellin 37 TC 111 (HL), 33 ITR 741.
2. Re Nandlal 7 ITR 452, 464; Rogers v Sec of State 1 ITC 363, 366; CIT v Steel 2 ITC 119, 137.
3. CIT v Aggarwal & Co. 56 ITR 20 (SC); CIT v TI & M Sales 166 ITR 93 (SC).
4. Hira Mills Ltd. v ITO 14 ITR 417. Cf. Abdullabhai Abdul Kadar v CIT 22 ITR 241.
5. Jethabhai Javeribhai v CIT 20 ITR 331.
6. Bombay Trust Corpn. Ltd. v CIT 3 ITC 135, 154, affirmed on this point but reversed on other points in CIT v Bombay Trust Corpn. Ltd . 4 ITC 312 (PC);
Oriental Inv. Corpn. Ltd. v CIT 7 ITC 211. Cf. CIT v Bombay Trust Corpn. Ltd. 4 ITR 323 (PC).
7. Bank of Chettinad Ltd. v CIT 8 ITR 522 (PC).
8. CIT v Remington Typewriter Co. (Bombay) Ltd. 5 ITC 177 (PC). Cf. Caltex (India) Ltd. v CIT 21 ITR 278.
9. CIT v Currimbhoy 3 ITR 395 (PC).
10. CIT v Visalakshi 5 ITR 448.
11. Wadia v CIT 17 ITR 63, 82–83, 124 (FC).
12. CIT v Currimbhoy Ebrahim & Sons Ltd 3 ITR 395, 400–01.
13. See also CIT v Metro 7 ITR 176, 185–86.
14. CIT v Currimbhoy 3 ITR 395, 401 (PC).
15. Ibid.
16. Cf. CIT v Assam Tea 167 ITR 215 (no asset or source in India).
17. CIT v Saurashtra Cement 101 ITR 502.
18. See s 5, under 'From whatever Source Derived'.
19. CIT v Anglo French 199 ITR 785.
20. Kusumben v CIT 47 ITR 214. See further under 'Dividend Paid Abroad by Indian Company'.
21. Caltex (India) Ltd. v CIT 21 ITR 278.
22. Kusumben v CIT 47 ITR 214; Cf. Bacha Guzdar v CIT 27 ITR 1 (SC).
23. CIT v Bombay Trust Corpn. 4 ITC 312 (PC); Bank of Chettinad v CIT 8 ITR 522 (PC).
24. See under 'Loans Advanced by Non-residents'.
25. CIT v National & Grindlays Bank Ltd. 72 ITR 121.
26. Wadia v CIT 17 ITR 63.
27. CIT v Meenakshi Mills Ltd. 63 ITR 609; CIT v National & Grindlays 72 ITR 121; CIT v Cochin Co. 104 ITR 655.
28. Wadia v CIT 17 ITR 63, 73 (FC), per Kania CJ. See also per Mahajan J at p. 100.
29. Porbandar State Bank v CIT 18 ITR 134.
30. Salzgitter Industrie Bau Gmbh v CIT 184 ITR 7.
31. Meturit AG v CIT 184 ITR 257.
32. Lakhmichand v CIT 43 ITR 315; CIT v Saurashtra Cement 101 ITR 502; CIT v Public Utilities Trust 143 ITR 236. Cf. s 36(1)(iii), under 'Interest on
borrowed capital'.
33. See CIT v Assam Tea 167 ITR 215, 229, where no such capital gains arose.
34. Triniti Corporation, In re , 295 ITR 258, 265 (AAR) – relying on G.V.K. Industries Ltd. v ITO 228 ITR 564, (1998) 1 An WR 332 [LNIND 1997 AP 439] ,
(1998) 96 Taxman 179 (AP) which was affirmed in GVK Industries Ltd. v ITO 332 ITR 130 (SC), (2011) 4 SCC 36 [LNIND 2011 SC 245] , (2011) 239 CTR (SC)
113.
35. CIT v Quantas 256 ITR 84.
36. Carrasco Investments Ltd. v Special Director, Enforcement Directorate(1994) 79 Comp Cases 631; Carew & Company v UOI AIR 1975 SC 2260 [LNIND
1975 SC 290] .
37. Venkatasamy Naidu R. v Enforcement Directorate AIR 1992 Mad 235 [LNIND 1991 MAD 15] .

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38. This included 22 per cent. held by a Mauritian company controlled by Essar.
39. Vodafone International Holdings BV v UOI 341 ITR 1, 20 (SC).
40. Vodafone International Holding BV v UOI 311 ITR 46.
41. Vodafone International Holdings BV v UOI 329 ITR 126.
42. Vodafone International Holdings BV v UOI 341 ITR 1 (SC).
43. Vodafone, ibid, p. 38-39.
44. Vodafone India Services P. Ltd. v CIT 385 ITR 169, 189-190, 323.
45. Vodafone, Ibid, 341 ITR 1, 51 (SC).
46. Vodafone, Ibid, 341 ITR 1, 51, 111 (SC).
47. Vodafone International Holdings BV v UOI 329 ITR 126, 181-183.
48. Serco BPO P. Ltd. v AAR 379 ITR 256, 285. Readers may note that India-Mauritius DTAA has been amended by introducing a Limitation of Benefits
(LOB) clause and the text of the amended DTAA may be referred to.
49. DIT v Copal Research Ltd. 371 ITR 114, 129.
50. The letter issued by CBDT is accessible at: http://itrvault.in/Uploaded_Documents/Attachment_
Documents/CBDT_s_Clarification_on_reopening_Assessments_due_to_Retro_Law_in_Finance_Act _2012.pdf, last accessed on May, 2020. It has not been
published in the ITR.
51. Circular No. 4 of 2015, March 26, 2015, 372 ITR (St.) 14.
52. Circular No. 28 of 2017, November 7, 2017, 400 ITR (St.) 5.
53. DIT v Copal Research Ltd. 371 ITR 114, 129.
54. CUB Pty. Ltd. v UOI 388 ITR 617, 628-629.
55. Humble Oil & Refining Co. v Calvert 414 S.W.2d 172 (1967).
56. DIT v Copal Research Ltd. 371 ITR 114, 130-132; Banca Sella SPA, In Re, 387 ITR 358 (AAR); GEA Refrigeration Technologies GmBH, In Re , 401 ITR 115
(AAR).
57. Expert Committee on Retrospective Amendments Relating to Indirect Transfer, 2012, 349 ITR (St.) 21.
58. CIT v BC Srinivasa Shetty 128 ITR 294 (SC).
59. Circular No. 41 of 2016, 390 ITR (St.) 7.
60. CIT v Skenando 103 ITR 29 ('operations' referred to are those of the non-resident sought to be taxed); Continental Const v CIT 195 ITR 81, 120 (SC)
(s 80-O); Great Lakes v CIT 202 ITR 64; VDO Tachometer v CIT 117 ITR 804, 818.
61. Harakchand v CIT 22 ITR 33.
62. CIT v Ahmedbhai Umarbhai 18 ITR 472.
63. Rahim v CIT 17 ITR 256, 267–68; CIT v Rodriguez 20 ITR 247.
64. Rahim v CIT 17 ITR 256; Pudukottah v CIT 47 ITR 352.
65. Anglo-French Textile Co. Ltd. v CIT 23 ITR 101, 107–08 (SC), followed in CIT v Jiyajeerao 118 ITR 72.
66. Motor Union Ins. v CIT 13 ITR 272.
67. Annamalais v CIT 41 ITR 781; Bikaner Textile v CIT 58 ITR 169.
68. Annamalais v CIT 41 ITR 781.
69. CIT v Gulf Oil 108 ITR 874; CIT v Dunlop 201 ITR 534; CTCI Overseas Corporation Ltd., In re, 342 ITR 217 (AAR).
70. CIT v Tata Chemicals Ltd 94 ITR 85.
71. Carborundum Co. v CIT 108 ITR 335, followed in VDO Tachometer v CIT 117 ITR 804; CIT v Fried Krupp 128 ITR 27; CIT v Usha 148 ITR 236; CIT v
Hegde 163 ITR 635; Massey v CIT 165 ITR 612; CIT v Goodyear Tyre 184 ITR 369; CIT v Atlas 164 ITR 401 and ITO v Shriram 164 ITR 419, affirmed in 224 ITR
724 (SC). In last two cases, profit on supply of know-how abroad was rightly held not taxable though foreign companies subsequently rendered
services in India under separate part of same agreement. Cf. p 405, n 87.
72. CIT v Toshoku Ltd . 125 ITR 525, followed in CIT v New Consolidated Gold Fields 143 ITR 599, affirmed in 257 ITR 770 (SC). Also see CIT v Gujarat
Reclaim and Rubber Productions Ltd. 383 ITR 236; Evolv Clothing Company P. Ltd. v ACIT 407 ITR 72.
73. CIT v Schreiner 182 ITR 429.
74. CIT v Qantas Airways Ltd. 251 ITR 264.
75. Turner Morrison v CIT 23 ITR 152 (SC); Anglo-French Textile v CIT 25 ITR 27 (SC); Pudukottah v CIT 47 ITR 352; Burugu v CIT 17 ITR 194; CIT v
Annamalais 18 ITR 333; Hira Mills v ITO 14 ITR 417; Rahim v CIT 17 ITR 256; CIT v Little 18 ITR 849, 858, 873.
76. Bikaner Textile v CIT 58 ITR 169.
77. Anglo-French Textile v CIT 23 ITR 101 (SC); Webb v CIT 18 ITR 33; Banglore Woollen v CIT 18 ITR 423; CIT v Steel 2 ITC 119; Jamnadas v CIT 46 ITR
233 (purchases of stock-in-trade).
78. Angel Garment Ltd., In re, 287 ITR 341 (AAR).
79. CIT v Jain 206 ITR 692.
80. Aramco Overseas Co. BV, In re, 322 ITR 612 (AAR).
81. Mustaq Ahmed, In re, 307 ITR 401 (AAR).
82. Ikea Trading (Hong Kong) Ltd., In re, 308 ITR 422 (AAR).
83. Rolls Royce PLC v DIT 339 ITR 147.
84. Time Inc v CIT 67 Taxman 518.
85. CIT v Visalakshi 5 ITR 448; Hira Mills v ITO 14 ITR 417; CIT v Bhumraddi 33 ITR 82; CIT v Metro 7 ITR 176; the questions formulated in CIT v Bombay
Trust Corpn. 4 ITR 312 (PC); CIT v Remington 5 ITC 177 (PC); CIT v Currimbhoy 3 ITR 395 (PC); Bank of Chettinad v CIT 8 ITR 522 (PC).
86. CIT v Bombay Trust Corpn. 4 ITR 323 (PC).
87. Ibid, pp 331, 333.
88. CIT v Pgnatale 124 ITR 391. See also Grindlays v CIT 193 ITR 457 (furlough pay).
89. CIT v S.R. Patton 233 ITR 166 (SC); CIT v Goslino Mario 241 ITR 312, (2000) 10 SCC 165 ; CIT v Belline 237 ITR 336.
90. CIT v Avtar Singh Wadhwan 247 ITR 260.
91. Hindustan Power Plus Ltd. In re, 271 ITR 433 (AAR).
92. See CIT v ONGC 217 ITR 816.
93. Sedco Forex International Drill Inc. v CIT 279 ITR 310 (SC), AIR 2006 SC 428 [LNIND 2005 SC 907] , (2005) 12 SCC 717 [LNIND 2005 SC 907] –
overruling CIT v Sedco Forex International 264 ITR 320, (2005) 197 CTR (All) 366; CIT v Haliburton Offshore Services 271 ITR 395; Reading & Bates Drilling
Co. v CIT 277 ITR 253.
1. CIT v Elitos S.P.A. 280 ITR 495, 499, (2005) 196 CTR (All) 638.
2. H.P. India Software Operation P. Ltd., In Re., 401 ITR 339 (AAR); Texas Instruments (India) P. Ltd., In Re, 401 ITR 289 (AAR).
3. Centrica India Offshore P. Ltd. v CIT 364 ITR 336.
4. Ibid, 364 ITR 336, 372-373.
5. Klaus Vogel on Double Taxation Conventions, p. 1187-1200 (Ekkehart Reimer & Alexander Rust eds., 4th ed. 2015); Q.C. Philip Baker, Double
Taxation Conventions: A manual on the OECD Model Tax Convention on Income and on Capital, p. 15-2/1 – 15-2/8, (Thomson Reuters, 2009); Kevin
Holmes, International tax policies and Double tax treaties: An introduction to principles and application, 321-340, (IBFD, 2nd ed. 2014).
6. CIT v Phra Phraison 3 ITC 237, decided under 1922 Act, no longer states the law.
7. CIT v Brown & Root Int. Inc. (2006) 202 CTR All 533.
8. Cf. Caldicott v Varty 51 TC 403.
9. Choudhury v UOI 186 ITR 329.
10. Following cases decided, under 1922 Act, with dealt taxability of dividend paid outside India: CIT v Goldie ILR 55 Bom 734; Gov-Gen-in-C v Raleigh
12 ITR 265, 275, on appeal 15 ITR 332 (PC); Caltex v CIT 21 ITR 278.
11. Bradbury v English Sewing Co. 8 TC 481, 508 (HL); Erie v Att-Gen AIR 1930 PC 10 .

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12. Gov-Gen-in-C v Raleigh 12 ITR 265, 278, on appeal 15 ITR 332 (PC).
13. Kusumben v CIT 47 ITR 214.
14. Ibid; Pfizer v CIT 259 ITR 391.
15. Section 44DA, inserted from assessment year 2004–05, contains special provisions for computing income by way of royalty or fees for technical
services in case of non-residents.
16. Queen v Melford Developments 82 DTC 6281 (Supreme Court of Canada); Citizen Watch v IAC 148 ITR 774, 787.
17. Electronics Corpn. v CIT 183 ITR 43 (SC); GVK Industries v ITO 228 ITR 564.
18. Electronics Corporation of India Ltd. v CIT 183 ITR 43, AIR 1989 SC 1707 , 1989 Supp (2) SCC 642 (SC).
19. GVK Industries Ltd. v ITO 228 ITR 564, (1998) 1 An WR 332 [LNIND 1997 AP 439] , (1998) 96 Taxman 179 (AP).
20. GVK Industries Ltd. v ITO 332 ITR 130 (SC), (2011) 4 SCC 36 [LNIND 2011 SC 245] , (2011) 239 CTR (SC) 113.
21. CIT v Vijay Ship 261 ITR 113.
22. DIT v Vanenberg Facilities BV 397 ITR 425.
23. Sumitomo Mitsui Banking Corpn. v DDIT 136 ITD 66 (ITAT-SB).
24. DIT v Credit Agricole Indosuez 377 ITR 102, 107-109.
25. CIT v Industrial Ltd. 202 ITR 1014; CIT v Creative Infocity Ltd. 397 ITR 165. See also s 4, under 'Reimbursement …not income'.
26. Citizen Watch v IAC 148 ITR 794; CIT v Davy Ashmore 190 ITR 626. Cf. Leonhardt v CIT 249 ITR 418.
27. See s 90.
28. CIT v Combustion Engineering 240 ITR 41; CIT v Sulzer 239 ITR 941; CIT v Krebs 229 ITR 615.
29. CIT v Montedison of Italy 367 ITR 179.
30. Meteor Satellite v ITO 121 ITR 311; CIT v Sri Krishna Oil 242 ITR 48; CIT v Neyveli Lignite 243 ITR 459. See also Expln. 1 to cll (vi) and (vii).
31. Leonhardt Andra UND partner Gmbh v CIT 249 ITR 418.
32. CIT v Aktiengesellschaft Kunhle Kopp and Kansch 262 ITR 513, (2003) 181 CTR (Mad) 511.
33. DIT v Ericsson A.B. 343 ITR 470.
34. Meteor v ITO 121 ITR 311.
35. CIT v Copes 167 ITR 884.
36. GVK Industries v ITO 228 ITR 564.
37. CIT v Klayman Porcelain Ltd. 229 ITR 735, 739.
38. CIT v Ahmedabad Calico 139 ITR 806.
39. Aziende v CIT 110 ITR 145.
40. Asian Development Service v CIT 239 ITR 713.
41. Orissa Synthetics Ltd. v ITO 203 ITR 34; Asian Development Service v CIT 239 ITR 713, 722; Elkem Technology v DCIT 250 ITR 164, 168.
42. Global Industries Asia Pacific Pte. Ltd., In re, 343 ITR 253; also see Western Geco International Limited., In re, 338 ITR 161; Geofizyka Torun Sp. Z. O.
O., In re, 320 ITR 268 (AAR).
43. CIT v Klayman Porcelains Ltd. 229 ITR 735; CIT v Koyo Seiko 233 ITR 421.
44. CIT v Maggronic Devices P. Ltd. 329 ITR 442; CIT v Creative Infocity Ltd. 397 ITR 165.
45. K Bhagyalakshmi v DCIT 416 ITR 497.
46. CIT v Klayman Porcelains Ltd. 229 ITR 735.
47. Cargo Community Network Pte. Ltd. In re, 289 ITR 355 (AAR).
48. Cushman & Wakefield (S) Ptd. Ltd. In re, 305 ITR 208, 223 (AAR); PCIT v Mira Exim Ltd. 400 ITR 28.
49. CIT v Neyveli Lignite 243 ITR 459, followed in CIT v Mitsui Engineering 259 ITR 248.
50. Ceat International SA v CIT 237 ITR 859.
51. CIT v Klayman Porcelains Ltd. 229 ITR 735, (1998) 96 Taxman 221 .
52. Factset Research Systems Inc., In re, 317 ITR 169, 179 (AAR).
53. Skycell Communications Ltd. v DCIT 251 ITR 53, (2001) 170 CTR (Mad) 238, contra Ajmer Vidyut Vitran Nigam Ltd., In re, 353 ITR 640.
54. Leohardt v CIT 249 ITR 418; CIT v Maggronic Devices P. Ltd . 329 ITR 442; Seabird Exploration FZ, LLC, UAE, In re , 326 ITR 558 (AAR); Joint
Accreditation System of Australia & New Zealand, In re , 326 ITR 487 (AAR); GeoQuest Systems B.V. In re , 327 ITR 1 (AAR); Cable & Wireless Networks
India P. Ltd. In re, 315 ITR 72 (AAR); See also Wavefield Inseis ASA, In re, 322 ITR 645 (AAR) – applying Wavefield Inseis ASA, In re, 320 ITR 290 (AAR).
55. NV Philips v CIT 172 ITR 521.
56. NV Philips v CIT 172 ITR 541.
57. CIT v Ahmedabad Calico 139 ITR 806.
58. Worley Parsons Service Pty. Ltd., In re, (No.1) 312 ITR 273 (AAR).
59. HCL Ltd. v CIT 372 ITR 441.
60. ISRO Satellite Centre, In re, 307 ITR 59 (AAR); Asia Satellite Telecommunications Ltd. v DIT 332 ITR 340.
61. Dell International Services Private Ltd., In re, 305 ITR 37 (AAR).
62. Poompuhar Shipping Corporation Ltd. v ITO 360 ITR 257. SLP against the decision of the Madras High Court has been admitted by the Supreme
Court.
63. CIT v Van Oord ACZ Equipment BV 373 ITR 133.
64. Verizon Communications Singapore Pte Ltd v ITO 361 ITR 575. SLP against the decision of the Madras High Court has been admitted by the
Supreme Court.
65. Technical Advisory Group (TAG), OECD, 2001.
66. OECD Model Tax Convention on Income and on Capital, OECD, 2017, p. 276, para 9.1 – 9.3.
67. In DIT v New Skies Satellite BV 382 ITR 114, 135, the Delhi High Court observed that the Madras High Court does not cite any reason for the
extension of the amendments to the DTAA.
68. Verizon Communications Singapore Pte Ltd v ITO 361 ITR 575, 604.
69. Klaus Vogel on Double Taxation Conventions, pg. 1011, (Ekkehart Reimer & Alexander Rust eds., 4th ed. 2015).
70. OEEC, Fiscal Committee Minutes of the 25th Session 6-9 June, FC/M(61)4 at p. 3.
71. Commissioners of HM Revenue & Customs v UBS AG, [2007] EWCA Civ 119 .
72. Goa Carbon v Muthuramalingam 251 ITR 348 (lower rate applied under s 115A).
73. International Tire Engineering Resources LLC, In re, 319 ITR 228 (AAR).
74. A Systems, In re, 345 ITR 479.
75. CIT v Mitsui Engineering 259 ITR 248.
76. DIT v Sheraton International Inc. 313 ITR 267, (2009) 221 CTR (Del) 752.
77. Formula One World Championship Ltd. v CIT 390 ITR 199, 261-262.
78. Tata Consultancy Services Ltd. v State of Andhra Pradesh 271 ITR 401, AIR 2005 SC 371 [LNIND 2004 SC 1132] , (2005) 1 SCC 308 [LNIND 2004 SC
1132] .
79. Alcatel – Lucent France v ADIT 384 ITR 113 (the software was embedded in the hardware).
80. CIT v ZTE Corporation 392 ITR 80.
81. DIT v Haldor Topsoe 369 ITR 453; CIT v Andhra Petrochemicals Ltd. 373 ITR 207.
82. Dassault Systems, In re, 322 ITR 125 (AAR).
83. Geoquest Systems B.V., In re, 327 ITR 1 (AAR).
84. Millennium IT Software Ltd., In re, 338 ITR 391 (AAR); CIT v Samsung Electronics Co. Ltd. 345 ITR 494.
85. Citrix Systems Asia Pacific Pty. Limited, In re, 343 ITR 1 (AAR).
86. PCIT v M Tech India P. Ltd. 381 ITR 31; CIT v Vinzas Solutions India P. Ltd. 392 ITR 155.
87. CIT v Samsung Electronics Co.Ltd. 345 ITR 494.

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88. CIT v Halliburton Export Inc. 386 ITR 123 (India-US DTAA).
89. Zylog Systems Ltd. v ITO 415 ITR 311.
90. CIT v Vinzas Solutions India P. Ltd. 392 ITR 155.
91. CIT v Synopsis International Ltd. 212 Taxman 454.
92. Geoquest Systems B.V. In Re. 327 ITR 1 (AAR) - following Dassault Systems B.V. In Re. 322 ITR 125(AAR).
1. CIT v ZTE Corporation 392 ITR 80, 95-96.
2. DIT v Infrasoft Ltd. 3 ITR-OL 333, 397.
3. Klaus Vogel on Double Taxation Conventions, p. 1014-1023 (Ekkehart Reimer & Alexander Rust eds., 4th ed. 2015); Philip Baker Q.C., Double
Taxation Conventions: A manual on the OECD Model Tax Convention on Income and on Capital, p. 12-8, (Thomson Reuters, 2009); Kevin Holmes,
International tax policies and Double tax treaties: An introduction to principles and application, p. 272-279, (IBFD, 2nd ed. 2014); OECD Model Tax
Convention on Income and on Capital, OECD, 2017, p. 280-284, para 12-18.
4. CIT v HEG Ltd. 263 ITR 230, (2003) 182 CTR (MP) 353.
5. Dun and Bradstreet Espana S.A., In re, 272 ITR 99 (AAR).
6. Factset Research Systems Inc., In re, 317 ITR 169 (AAR), contra CIT v Wipro Ltd. 355 ITR 284.
7. Thoughtbuzz Pvt. Ltd. In re, 346 ITR 345.
8. DIT v Ericsson A.B. 343 ITR 470; Dassault System K.K., In re, 322 ITR 125 (AAR); Asia Satellite Telecommunications Co. Ltd. v DIT 332 ITR 340.
9. DIT v Infrasoft Ltd. 3 ITR-OL 333, 400, the decision of the Karnataka High Court in CIT v Samsung Electronics Co. Ltd. 345 ITR 494, is dissented from.
10. Asia Satellite Telecommunications Co. Ltd. v DIT 332 ITR 340.
11. CIT v Siemens Aktiengesellschaft 310 ITR 320; Sanofi Pasteur Holding SA v Department of Revenue 354 ITR 316; DIT v Nokia Networks OY 358 ITR
259; DIT v New Skies Satellite BV 382 ITR 114.
12. CIT v Bharti Cellular Ltd. 319 ITR 139, (2008) 220 CTR (Del) 258.
13. Skycell v DCIT 251 ITR 53.
14. CIT v Estel Communications P. Ltd. 318 ITR 185, (2008) 217 CTR (Del) 102 – SLP dismissed; - 310 ITR (St) 2.
15. Elkem Technology v DCIT 250 ITR 164.
16. CIT v Copes Vulcan Inc 167 ITR 884, (1986) 57 CTR (Mad) 244; Aktiengesellschaft v CIT 267 ITR 209, (2004) 188 CTR (Kar) 497 .
17. Wallace Pharmaceuticals Private Ltd., In re, 278 ITR 97 (AAR).
18. South West Mining Ltd., In re, 278 ITR 233 (AAR); Infosys Technologies Ltd. In re, 350 ITR 178.
19. DIT v Lufthansa Cargo India 375 ITR 85.
20. Endemol India P. Ltd., In Re (No. 3), 361 ITR 361 (AAR); Endemol India P. Ltd., In Re (No. 4), 361 ITR 658 (AAR); CIT v Media World Wide P. Ltd. [2020]
15 ITR-OL 145.
21. Timken India Ltd., In re, 273 ITR 67 (AAR).
22. Infosys Technologies Ltd., In re, 350 ITR 178.
23. XYZ, In re, 348 ITR 31; XYZ, In re, 348 ITR 45; XYZ, In re, 348 ITR 20.
24. Guangzhou Usha International Ltd., In Re. 378 ITR 465 (AAR). The expression "provision of service" under India-China DTAA is wider in scope than
the expression "provision of rendering".
25. Orissa Synthetics Ltd. v ITO 203 ITR 34; Cochin Refineries v CIT 222 ITR 354; Elkem Technology v DCIT 250 ITR 164.
26. CIT v Bharat Electricals 252 ITR 218; DIT v HCL Infosystems Ltd. 274 ITR 261, 263, (2004) 192 CTR (Del) 108; – salaries have been excluded in
Explanation 2 to s 9(1)(vii).
27. CIT v Model Exims 363 ITR 66.
28. Cummins Ltd., In Re., 381 ITR 44 (AAR).
29. Dr. Reddy Laboratories Ltd., In Re., 387 ITR 337 (AAR).
30. CIT v Faizan Shoes P. Ltd . 367 ITR 155, 162-163; CIT v Kikani Exports P. Ltd . 369 ITR 96; CIT v Hero Motocorp Ltd. 394 ITR 403; Evolv Clothing
Company P. Ltd. v ACIT 407 ITR 72; CIT v Farida Leather Company [2017] 9 ITR-OL 328.
31. CIT v IndusInd Bank Ltd. 415 ITR 115.
32. Oxford University Press, In Re., 364 ITR 251 (AAR).
33. Ernst & Young Private Ltd. In re, 323 ITR 184 (AAR).
34. Pintsch Bamag, In re, 318 ITR 190 (AAR); Cholamandalam General Insurance Co. Ltd. In re, 309 ITR 356 (AAR); ISRO Satellite Centre, In re, 307 ITR 59
(AAR); Spahi Projects P. Ltd., In re, 315 ITR 374 (AAR).
35. GMP International GmbH, In re, 321 ITR 411 (AAR); A.T. & S. India P. Ltd. In re, 287 ITR 421 (AAR).
36. Shell India Markets Pvt. Ltd., In re, 342 ITR 223 (AAR).
37. DIT v Rio Tinto Technical Services 340 ITR 507.
38. CIT v Estel Communications Ltd. 318 ITR 185.
39. Clouth v CIT 238 ITR 861.
40. International Operating Services Ltd. v CIT 228 ITR 599.
41. M-1 Overseas Ltd., In re, 349 ITR 166.
42. C.A.T. GeodataGmbh, In re, 346 ITR 549.
43. Spectrum Geo Ltd., In re, 346 ITR 422.
44. Goa Carbon v Muthuramalingam 251 ITR 348.
45. CIT v Grup ISM P. Ltd. 378 ITR 205.
46. GVK Industries Ltd. v ITO 228 ITR 564 on appeal, the Supreme Court referred the issue to a Larger Bench which made far reaching but erroneous
observations on the scope of Art. 245(2). See GVK Industries Ltd. v CIT 332 ITR 130, (2011) 4 SCC 36 [LNIND 2011 SC 245] , (2011) 239 CTR (SC) 113.
47. GVK Industries Ltd. v ITO 332 ITR 130, (2011) 4 SCC 36 [LNIND 2011 SC 245] , (2011) 239 CTR (SC) 113.
48. CIT v Sundwiger Gmbh 262 ITR 110, (2003) 3 ALD 744 , (2003) 5 ALT 73 , (2003) CTR (AP) 434 .
49. PCIT v Senior Manager, BHEL 390 ITR 322.
50. Geofizyka Torun Sp.Z.O.O., In re , 320 ITR 268 (AAR); Seabird Exploration FZ LLC, In re , 320 ITR 286 (AAR); Wavefield Inesis Asa, In re, 320 ITR 290
(AAR); Seabird Exploration FZ LLC, In Re., 403 ITR 82 (AAR).
51. DIT v Jindal Drilling and Industries Ltd. 320 ITR 104; (2009) 182 Taxman 59 (Del); DIT v OHM Ltd., 352 ITR 406.
52. ONGC v CIT 376 ITR 306 (SC); Corpro Systems Ltd, In Re, 389 ITR 29 (AAR); PGS Exploration (Norway) AS v ADIT 383 ITR 178, following ONGC v CIT
376 ITR 306 (SC) – two dimensional and three dimensional seismic survey.
53. ONGC Ltd v CIT 376 ITR 306, 317-318 (SC).
54. Technip Singapore Pte. Ltd. v DIT 385 ITR 408, following Asia Satellite Telecommunications Co. Ltd. v DIT 332 ITR 340.
55. AEG Aktiengesellschaft v CIT 267 ITR 209, (2004) 188 CTR (Kar) 497 .
56. CIT v Kotak Securities Ltd. 383 ITR 1, 7 (SC).
57. CIT v Kotak Securities Ltd. 383 ITR 1 (SC).
58. Ibid, 383 ITR 1, 7-8.
59. Akamai Technologies Inc. In Re, 404 ITR 495 (AAR); India – US DTAA, following CIT v Kotak Securities Ltd. 383 ITR 1 (SC).
60. DIT v AP Moller Maersk 392 ITR 186 (SC) – (Booking and communication software, hardware and date communications network).
61. MasterCard Asia Pacific Pte. Ltd., In Re., 406 ITR 43, 141-144 (AAR). A part of the fees received/to be received by the applicant from Indian
customers (comprising transaction processing fees, assessment fees and transaction related miscellaneous fees) would be classified as royalty within
the meaning of the term in Article 12 of the India-Singapore DTAA. However, since it is effectively connected to permanent establishment, it would be
taxed under Article 7 and not under Article 12.
62. See Infra "Make Available".
63. Ibid, p. 144-147.
64. PCIT v Madhyanchal Vidyut Vitran Nigam Ltd. 404 ITR 160, 169-170; ACIT v Gulbarga Electricity Supply Co. Ltd . 387 ITR 484; CIT v Delhi Transco

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Ltd. 380 ITR 398, 411; CIT v Hubli Electric Supply Co. Ltd. 386 ITR 271; CIT v Maharashtra State Electricity Distribution Co. Ltd. 375 ITR 23.
65. UC Berkeley Center for Executive Edn., USA , In Re., 387 ITR 385 (AAR); The Regents of the University of California UCLA Anderson School of
Management Executive Education, USA, In Re, 387 ITR 398 (AAR).
66. Endemol India P. Ltd. In Re 361 ITR 340 (AAR); US Technology Resources (Pvt) Ltd. v CIT 407 ITR 327; Production Resource Group, In Re, 401 ITR 256
(AAR); Measurement Technology Ltd., In Re., 376 ITR 461 (AAR); DIT v SNC Lavalin International Inc. 332 ITR 314.
67. Asian Development v CIT 239 ITR 713; Clouth v CIT 238 ITR 861; See also s 28, 'Tax-free business income'.
68. Elkem Technology v DCIT 250 ITR 164.
69. NV Philips v CIT 172 ITR 541.
70. CIT v Neyveli Lignite 243 ITR 459, (2000) 162 CTR (Mad) 206.
71. Aziende Colori Nazionali v CIT 110 ITR 145.
72. ABC, In re, 345 ITR 119.
73. Ishikawajima Harima Heavy Industries Ltd. v DIT 288 ITR 408, AIR 2007 SC 929 [LNIND 2007 SC 10] , (2007) 3 SCC 481 [LNIND 2007 SC 10] ; but see
South West Mining 278 ITR 233 (AAR). Also see Michelin Tamil Nadu Tyres P. Ltd., In Re., 401 ITR 164 (AAR).
74. CIT v Siemens AG 310 ITR 320, (2008) 220 CTR (Bom) 425.
75. Clifford Chance v DCT 318 ITR 237, (2009) 111 Bom LR 428 .
76. Worley Parsons Pty. Ltd., In re, 312 ITR 273 (AAR); Worley Parsons Pty. Ltd., In re, 312 ITR 317 (AAR).
77. Jindal Thermal Power Company Ltd. v DCIT 321 ITR 31, (2009) 225 CTR (Kar) 220 [LNIND 2009 KANT 142] .
78. See Circular No. 23 of 1969, July 23, 1969, withdrawn by Circular No. 7 of 2009, October 22, 2009, 318 ITR (St.) 1.
79. CIT v Model Exims 358 ITR 72; CIT v Allied Exims 363 ITR 62.
80. GVK Industries v UOI 332 ITR 130 (SC), (2011) 4 SCC 36 [LNIND 2011 SC 245] .
81. GVK Industries Ltd. v ITO 371 ITR 453, 467 (SC). On facts, the Court held that the expert service of qualified and experienced professionals for
preparing a scheme for raising funds would come within the ambit of the term 'consultancy service', and consequently, liable to tax as fees for
technical services. Also see DIT v Lufthansa Cargo India 375 ITR 85, 105.
82. Worley Parsons Service Pty. Ltd. In re, (No. 2), 312 ITR 317 (AAR).
83. Grasim Industries Ltd. v CIT 332 ITR 276.

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