The Indian Income Tax Act, 1961, has clear provisions under Section 9(1)(i) to tax income accruing or arising through or from any source in India. This section ensures that income with a nexus to India is taxed, irrespective of whether it is directly received in India. Understanding the scope of “source” under this section is critical for individuals and entities dealing with cross-border income.
In this blog, we will explore the nuances of Section 9(1)(i), its interpretation by courts, practical examples, and its significance in international taxation.
What Does “Source” Mean Under Section 9(1)(i)?
The term “source” is not just a legal concept—it is what a practical person would regard as the origin of income. Courts have clarified that “source” encompasses the property or activity that generates income. This includes movable or immovable property, businesses, royalties, and dividends.
Key Case Interpretations:
- Kurumben D. Mahadevia v. CIT (1963): The court described “source” as property or activity that yields income to the taxpayer.
- Rhodesia Metals Ltd. v. Commissioner of Taxes (1941): The Privy Council highlighted that “source” is determined by practical considerations rather than strict legal definitions.
These interpretations form the backbone of Section 9(1)(i), ensuring income linked to India’s economy is taxable.
Taxing Dividend Income:
The source of dividend income can be interpreted in two ways:
- Shares held by the taxpayer – The ownership of shares is considered the source of the income.
- Profits of the company – Dividends arise from the profits generated by the company.
Important Cases on Dividend Taxation:
- Kusumben D. Mahadevia v. CIT (1963): Dividend income declared in the Baroda State was deemed taxable in British India as the source of the income was linked to India.
- Caltex (India) Ltd. v. CIT (1952): Dividends received by a foreign company from profits generated in India were taxed as income accruing from a source in India.
Practical Illustrations of Section 9(1)(i):
1. Company Dividends:
A company incorporated abroad, earning profits in India, distributes dividends to its foreign shareholders. As the profits originate in India, the dividends are taxable in India.
2. Interest on Delayed Payments:
If an Indian seller charges interest for delayed payments from an Indian buyer, the interest is deemed income accruing in India, regardless of where the transaction is finalized (Lakhmichand Muchhal v. CIT).
3. Broadcasting Royalties:
Broadcasting fees paid to a foreign association for music broadcasted in India are taxable in India. This was upheld in Performing Right Society v. CIT.
4. Import Entitlements:
Import entitlements granted without a clear connection to India are not deemed as income accruing in India (CIT v. Anglo French Textiles).
Income from Undisclosed Sources:
Even if the source of income is undisclosed, it may still be taxable under Section 9(1)(i) if there is evidence of a nexus to India. For instance, income discovered in the hands of a statutory agent acting for a non-resident principal can be deemed to accrue in India (Hazoora Singh v. CIT).
International Taxation: OECD and UN Models
Section 9(1)(i) aligns with international frameworks such as the OECD and UN Model Tax Conventions (MTCs). These conventions guide countries on taxing cross-border income:
OECD MTC (2017):
- Gains from immovable property or business assets are taxed in the source country.
- Other capital gains are taxed in the resident country unless a bilateral treaty provides otherwise.
UN MTC (2021):
- Offers greater taxing rights to the source country, reflecting the interests of developing nations.
- Includes additional provisions for taxing gains from the alienation of shares, partnerships, and trusts.
These models influence India’s tax treaties and ensure Section 9(1)(i) is harmonized with international standards.
Why Section 9(1)(i) Matters:
- Ensures Source-Based Taxation: India captures income linked to its economy, whether earned by residents or non-residents.
- Addresses Cross-Border Transactions: Provides clarity on taxing income with Indian origins in an increasingly globalized economy.
- Prevents Revenue Loss: By deeming income accruing in India as taxable, the provision curtails tax avoidance.
FAQs on Income Accruing or Arising Through or From Sources in India (Section 9(1)(i))
1. What does “income deemed to accrue or arise in India” mean?
Income is deemed to accrue or arise in India when it is linked to a source in India, even if it is received outside India. This includes income from business operations, property, or activities connected to India, such as dividends, royalties, or interest.
2. How is “source” defined under Section 9(1)(i)?
“Source” refers to the origin or activity that generates income. It could be property (movable or immovable) or activities such as conducting business, earning royalties, or holding shares in a company.
3. Are dividends received from an Indian company by a non-resident taxable in India?
Yes, dividends declared by an Indian company and paid to a non-resident shareholder are taxable in India, as the source of the income (the company’s profits) is located in India.
4. Is interest on delayed payments by Indian buyers taxable in India?
Yes, interest on delayed payments for transactions with Indian buyers is deemed to accrue in India and is taxable, regardless of the location of the seller.
5. How does Section 9(1)(i) apply to international royalties?
If royalties are paid for services, licenses, or rights used in India, the income is deemed to accrue in India and is taxable under this section, even if the payment is made to a foreign entity.
6. Are foreign companies taxed under Section 9(1)(i)?
Yes, foreign companies can be taxed under Section 9(1)(i) if they earn income from Indian sources, such as profits from Indian operations, royalties, or dividends from Indian companies.
7. How does Section 9(1)(i) interact with tax treaties?
Tax treaties between India and other countries may modify the application of Section 9(1)(i). These treaties prevent double taxation and allocate taxing rights between the source country (India) and the residence country.
8. What role do the OECD and UN Model Tax Conventions play in Section 9(1)(i)?
The OECD and UN MTCs provide guidelines for taxing cross-border income. While the OECD MTC prioritizes residence-based taxation, the UN MTC emphasizes source-based taxation, aligning with India’s preference for taxing income arising within its jurisdiction.
9. Can income from undisclosed sources be taxed under Section 9(1)(i)?
Yes, undisclosed income can still be deemed to accrue in India if there is evidence of a connection to an Indian source, such as through a statutory agent acting on behalf of a non-resident.
10. Are capital gains from shares in Indian companies taxable for non-residents?
Yes, capital gains from the sale of shares in Indian companies are taxable in India as the source of the income (the company’s location and valuation) is in India.
Conclusion:
Section 9(1)(i) of the Indian Income Tax Act is pivotal in determining the taxation of income with a nexus to India. Its broad scope covers dividends, royalties, interest, and even undisclosed income linked to Indian activities. Coupled with international frameworks like the OECD and UN MTCs, this provision ensures India effectively taxes income generated within its borders.
Understanding these rules is essential for individuals and businesses engaged in cross-border activities. Proper compliance not only avoids penalties but also strengthens global trade relations by adhering to robust tax systems.
For personalized guidance on cross-border taxation or to navigate specific scenarios, consult a tax professional to ensure compliance with Indian and international tax laws.
