The Income Tax Act, 1961, is a cornerstone of Indian tax law, laying down the framework for taxing income. Among its key provisions, Section 9 is crucial as it determines when income is deemed to accrue or arise in India. This article provides a comprehensive overview of Section 9 with a special focus on salaries, pensions, and international scenarios, highlighting relevant judicial precedents and recent amendments.
Key Provisions of Section 9
Section 9 categorizes income that is deemed to accrue or arise in India under various scenarios, including:
- Income from Business Connection in India
- Income from Property, Asset, or Source in India
- Income from Salaries Earned in India
- Income from Pensions
We will delve deeper into the taxation of salaries and pensions, addressing interpretations, amendments, and judicial rulings.
Taxation of Salaries (Section 9(1)(ii))
As per Section 9(1)(ii), income under the head “Salaries” is deemed to accrue or arise in India if it is earned in India. This includes salaries paid for services rendered in India, irrespective of where the payment is made.
Key Judicial Precedents:
- CIT v. S.G. Pgnatale (1980)
The Gujarat High Court initially held that “earned in India” refers to salaries arising or accruing in India and not necessarily from services rendered in India. However, this interpretation was superseded by the Finance Act, 1983, which clarified that salaries for services rendered in India are deemed to be earned in India. - CIT v. S.R. Patton (1998)
This case reiterated the retrospective effect of the 1983 amendment, making it applicable from the assessment year 1979-80 onwards. - Sedco Forex International Drilling Inc. v. CIT (2005)
The Supreme Court clarified that salaries paid for periods of rest or leave, unless directly tied to services rendered in India, are not deemed to accrue in India.
Recent Developments:
The Finance Act, 1999, expanded the scope of taxation for assessment years 2000-01 onwards, ensuring that salaries during rest periods or leave are taxable if they precede and succeed services rendered in India.
Taxation of Pensions
Pensions received by Indian residents from foreign employers are addressed under Section 9(1) and clarified by Circular No. 4, dated February 20, 1969. Key points include:
- Pensions Earned Abroad:
If a pension is earned abroad and first received abroad, it is not taxable in India unless the recipient brings it into India. - Direct Receipt in India:
If a pension is directly received in India under an agreement with the employer, it becomes taxable in India on a receipt basis.
Residential Status Matters:
- Non-resident or Resident but Not Ordinarily Resident (RNOR):
Pensions earned and received abroad are not taxable in India. - Resident and Ordinarily Resident (ROR):
Such pensions are taxable in India.
Double Taxation Avoidance Agreements (DTAAs)
India has signed several DTAAs to avoid double taxation of income, aligning closely with the OECD Model Tax Convention (2017) and the UN Model Tax Convention (2021). Article 15 of these conventions governs the taxation of salaries:
- Income Taxable Only in Resident State:
Salaries are generally taxable in the resident’s home country unless the individual works in another country. - Exception for Short-term Employment:
If the individual spends less than 183 days in the other country and meets specific criteria, income remains taxable only in the home country. - Employment on Ships or Aircraft:
Income earned aboard ships or aircraft in international traffic is taxable only in the resident’s home country.
International Considerations and Exemptions
Judicial Rulings:
- CIT v. Goslino Mario (2000):
Salaries paid to foreign technicians working in India were deemed non-taxable for assessment years prior to 1979-80 due to retrospective amendments. - CIT v. NHK Japan Broadcasting Corporation (2010):
The Supreme Court ruled that statutory levies like Japan’s “Citizen Tax” constitute overriding charges on salary income and must be excluded from the taxable income.
Exemptions for Foreign Employees:
Foreign employees working in India may avail exemptions under Section 10(6), such as those employed under technical assistance programs.
Practical Implications for Taxpayers
- Foreign Salaries:
Ensure compliance with Section 9 and DTAAs to determine the taxability of foreign salaries. - Pension Recipients:
Understand the tax implications based on your residential status. - Employers:
Maintain clarity in contracts regarding salary components tied to services in India.
FAQs on Section 9 of the Income Tax Act
1. What constitutes income “earned in India”?
Income is considered earned in India if it arises from services rendered within the country, regardless of where the payment is made.
2. Is pension received from abroad taxable in India?
Pensions accrued abroad are taxable in India only if earned in India. Pensions received directly in India are taxable on a receipt basis.
3. Are living allowances for foreign employees taxable in India?
Yes, living allowances are taxable unless they are reimbursements for official purposes and do not constitute personal benefits.
4. Are salaries paid during field breaks taxable in India?
No, salaries paid for field breaks abroad are not taxable in India unless the employee is engaged in services during the break in India.
5. How do DTAAs affect the taxation of salaries and pensions?
DTAAs prevent double taxation by allocating taxing rights between India and the other contracting state, based on residency and source of income.
6. What is the significance of the 183-day rule?
Under many DTAAs, income from employment in a foreign country is exempt from taxation in the source country if the individual stays there for less than 183 days during a fiscal year and other conditions are met.
Conclusion
Section 9 of the Income Tax Act, 1961, plays a pivotal role in determining the taxability of income sourced from India, particularly in the context of globalization and cross-border employment. Recent amendments and judicial rulings emphasize the need for clarity and adherence to the law. Taxpayers and employers must stay informed about these provisions to ensure compliance and optimize their tax liabilities.
For professional advice and updates on Indian tax laws, consult a tax expert or refer to the official circulars and amendments.
