Section 9 Income deemed to accrue or arise in India.

Income-tax Act, 2025 [As Passed]

At a Glance

Clause 9 of the Income Tax Bill, 2025 (Old Version) sets out the incomes that are to be treated as deemed to accrue or arise in India, covering source rules for salaries, dividends, interest, royalty, fees for technical services, business connection (including significant economic presence), and transfers of capital assets situated in India. It matters because it defines the taxable reach over non-residents and cross-border transactions; affected parties include non-resident persons, residents paying such incomes, eligible investment funds and their managers. Effective or decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 9 (Income deemed to accrue or arise in India) of the Income Tax Bill, 2025 (Old Version). Context: sets the basis of charge and source rules for determining when various types of income are to be treated as arising in India for tax purposes. Coverage includes income from assets/sources/property in India, business connections (including significant economic presence), salaries, dividends, interest, royalty, fees for technical services, and transfers of capital assets situated in India.

Definitions or explanations provided in the clause: "royalty" and "fees for technical services" are defined for the clause; "business connection" and "significant economic presence" are explained by examples and thresholds to be prescribed; "computer software", "process" and "specified date"/"accounting period" are defined within their respective sub-sections. Other statutory or cross-references are to section 173(c), Schedule I, and certain SEBI regulations; additional cross-references to sections 159 and 6(13) appear in the text.

Statutory Provision Mode

Text & Scope

The clause captures a set list of incomes deemed to accrue or arise in India: (i) income from any asset/source/property in India; (ii) income from a business connection in India; (iii) income from transfer of capital asset situated in India; (iv) salaries with specified links to services in or connected to India; (v) dividends paid by an Indian company outside India; (vi) interest, subject to specified exceptions and with PE banking interest charge mechanics; (vii) royalty and technical fees with detailed coverage; (viii) income arising outside India u/s 2(49)(u) when paid by Indian residents to non-residents/foreign companies or persons not ordinarily resident. The clause is a source/territorial rule - a non-exhaustive set of entries that bring income within Indian taxing reach.

Interpretation

Legislative intent, as discernible from text: to extend the charge to India over income connected with Indian assets, operations or significant economic engagement and to modernise source rules to include digital/economic presence (e.g., "significant economic presence", advertisements targeting Indian users, sale of data collected from Indian users). The clause signals an intention to capture income where economic value is derived from India even if legal formalities (agreement location, residency) are elsewhere. Interpretive principles indicated: inclusive language ("shall include") and detailed examples suggest an expansive source rule; cross-references to prescribed amounts and rules show reliance on subsidiary legislation to set thresholds.

Exceptions/Provisos

Carve-outs and conditions included in the clause:

• Interest and royalty exceptions where payable by a resident in respect of debts/moneys incurred and used for business/profession outside India or for earning income from sources outside India.
• Fees for technical services exclude consideration for construction/assembly/mining projects and amounts that would be income under "Salaries".
• Business connection exclusions: activities through an agent having independent status acting in the ordinary course of business, and specified confined activities (purchase of goods for export, news collection, display of diamonds in special zones, shooting of cinematographic films in certain foreign persons/entities).
• For transfers of foreign company shares deemed situated in India, exceptions exclude certain holdings by foreign portfolio investors and transfers where the transferor lacks management/control/voting thresholds (with specified time window of 12 months).
• Fund management by eligible investment funds via eligible fund managers located in India is not a business connection of that fund; Schedules and notifications govern further conditions.

Illustrations

• Example 1: A non-resident provides consultancy services wholly online, systematically solicits business in India and targets Indian users; income from those services would be deemed to arise in India where interactions meet the "significant economic presence" tests (subject to prescribed thresholds). (Based solely on clause language.)
• Example 2: A resident borrows funds and uses them entirely for a business conducted outside India; interest paid to the lender is excluded from being deemed to accrue/arise in India under the stated exception. (Directly from clause text.)
• Example 3: A foreign company transfers shares of an overseas entity that derive substantial value from Indian assets (value above ten crore rupees and >=50% of entity assets on specified date); part of the transfer gain may be treated as arising in India unless exceptions (e.g., held by qualifying FPIs) apply. (Based on clause provisions.)

Interplay

Interactions with other provisions: cross-references to section 173(c) for "permanent establishment" meaning; reference to section 6(13) and section 2(49)(u) for certain income categories; Schedule I governs conditions for eligible investment funds/managers; references to SEBI regulations for FPI categories; sections 159/other sections govern "associated enterprises" (document shows both 159 and 162 in the two versions - in this Bill text section 159 is cited). The clause anticipates prescribed thresholds and rules (amounts and user-number tests) which will be specified by subordinate rule-making - creating dependence on regulations for certain operational details.

Differences between Section 9 (Income-tax Act, 2025 [As Passed]) and Clause 9 (Income Tax Bill, 2025 - Old Version)

• Structural renumbering and reordering: The As Passed version reorganises certain topics (for example, the provisions dealing with deemed situs of shares/capital assets moved to sub-section (10) in the As Passed text whereas in the Bill text the parallel material appears in sub-section (9)).
  • Practical impact: Largely editorial, but reordering may affect cross-references elsewhere in the statute and requires practitioners to check citation references when using either text.
• Wording of "Salaries" clause: The As Passed version (sub-section (3)) frames salary income as "deemed to accrue or arise in India, if it is- (a) earned in India, and any income payable for,- (i) services rendered in India; and (ii) the rest period or leave period ................... shall be regarded as income earned in India" while the Bill (old) lists three separate clauses (a)-(c) including "payable for services rendered in India" and the rest/leave period clause and the Government-to-Indian-citizen clause.
  • Practical impact: The As Passed formulation emphasises "earned in India" as the primary hook and bundles related concepts into a conjunctive formulation; the practical taxation outcomes appear intended to be the same but the As Passed language may be used to argue a different interpretive starting point (i.e., focus on "earned").
• Definitions and clarifications for interest/PE: Both texts treat interest payable by Government/resident/non-resident similarly. The As Passed (5)(b) expands the treatment of interest payable by an Indian permanent establishment of a foreign bank, expressly treating the PE as a person separate from the non-resident and stating that PE interest is chargeable "in addition to any income attributable to such permanent establishment." The Bill (old) contains a comparable paragraph but arranges the clauses differently.
  • Practical impact: Substantive treatment remains comparable; any practical change is limited to drafting clarity reinforcing separate taxation of intra-group interest involving an Indian PE.
• Royalty and computer software: Both versions define royalty broadly and include computer software; the As Passed text explicitly adds an exclusion cross-reference to "amounts referred in section 61(2) (Table: Sl. No. 5)".
  • Practical impact: The As Passed addition could exclude certain specified amounts (as listed in section 61(2) Table Sl. No.5) from being treated as royalty. The Bill (old) does not include that explicit cross-reference, so the As Passed wording narrows royalty in a manner tied to section 61(2) entries.
• Fees for technical services: Both texts adopt a broad definition; the Bill (old) phrases sub-section (7)(b) in prose then lists exclusions. The As Passed text is substantively similar but slightly rephrased.
  • Practical impact: No major substantive divergence apparent; differences are drafting and sequencing.
• Business connection / significant economic presence (SEP): Both texts introduce "significant economic presence" and similar agent/agency rules. The As Passed text (9)(d)-(g) explicitly prescribes that a SEP arises on certain transactions above "such amount as may be prescribed" and on "systematic and continuous soliciting ... with such number of users ... as may be prescribed." The Bill (old) uses similar wording but includes minor drafting differences (e.g., some cross-references, and the Bill's carve-outs/phrasing differ in punctuation and placement).
  • Practical impact: Substantively similar; SEP continues to expand source tax reach to digital/specified economic activity, and practical impact is that non-residents with sufficient payments or user engagement may now be taxed-administrative guidance (prescription of amount/number of users) will determine operational effect; both texts leave those critical thresholds to subordinate rule-making.
• Situs of shares/capital assets derived substantially from Indian assets: The As Passed text provides detailed quantitative tests (value > ten crore rupees and representing at least 50% of value) and prescribes valuation rules and specified date definitions. The Bill (old) contains comparable tests, but differs in certain cross-references: the Bill references "section 159" for associated enterprises while the As Passed references "section 162"; the As Passed elaborates prescribed determination "in the manner, as may be prescribed" and includes provisions for partial attribution where not all assets of the offshore entity are in India.
  • Practical impact: Substantive policy is similar - transfers of offshore shares deriving substantial value from Indian assets can give rise to Indian taxation - but differences in cross-references to definitions of "associated enterprises" and the specific statutory placement of valuation methodology may affect interpretation in connected-party contexts and transfer pricing/attribution analyses.
• Eligible investment fund carve-outs: Both texts exempt fund management activity carried out by an eligible investment fund through an eligible fund manager from constituting a business connection in India. The As Passed substitutes wording "as per the provisions of Schedule I" for the Bill's "subject to the provision of Schedule I".
  • Practical impact: Largely drafting; As Passed may reflect final placement of conditions in Schedule I. Both grant Central Government power to relax conditions for IFSC-located eligible fund managers commencing by 31 March 2030.
• Expression "through": The As Passed includes an express definition in sub-section (13) that "through" includes "by means of", "in consequence of" or "by reason of". The Bill (old) places a similar definition in sub-section (13) but references it as applying to sub-section (2).
  • Practical impact: Minimal; explicit definitional clarity reduces interpretive disputes about "through".
• Cross-reference and drafting differences: Several cross-references and section numbers (e.g., associated enterprises reference) differ.
  • Practical impact: Potential for interpretive differences where the new numbering or references change meaning; practitioners must verify definitions in the final Act (e.g., whether "associated enterprises" is defined in section 162 or 159).

Practical Implications

• Compliance and risk areas: Non-resident enterprises with digital or remote interactions with Indian users must track prescribed thresholds for "significant economic presence"; payers in India must identify when TDS obligations arise on royalties, interest and technical fees under the clause; cross-border transfers of shares of foreign entities require analysis of the underlying asset composition to determine Indian taxability.
• Record-keeping/evidence: Clause highlights need to document use of borrowed funds (to claim interest exception), substantiation of where services are utilised, accounting-period valuations and specified date valuations for asset value tests, and records evidencing investment categorisation (e.g., FPI status) and voting/management control for transfer exemptions.

Key Takeaways

• Clause 9 establishes broad source rules deeming specified incomes to accrue or arise in India, extending Indian tax reach.
• It modernises the concept of "business connection" to include "significant economic presence" with prescribed transactional and user-interaction thresholds.
• Specific definitions for "royalty", "fees for technical services", "process", and "computer software" are included to clarify scope.
• Several carve-outs and exceptions exist (e.g., for certain uses of borrowed funds, construction projects, independent agents, FPIs) that limit application in stated circumstances.
• Transfers of shares of foreign entities are subject to asset-based tests and specified date valuations to determine Indian taxability, with exemptions for limited holdings.
• Dependence on prescribed thresholds, schedules and notifications means practical operation will rely on subordinate rules.
• Eligible funds and fund managers have specific non-attribution rules, preserving a measure of neutrality for fund investors while regulating managers.

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Full Text:

Section 9 Income deemed to accrue or arise in India.

Significant economic presence expands source taxation, bringing digital interactions and remote services within the domestic tax net. Section 9 sets an expansive source taxation rule deeming income to accrue or arise domestically where linked to domestic assets, a business connection (including agents), transfers of capital assets situated domestically, salary earned or payable for services linked to domestic performance, dividends of domestic companies, interest subject to exceptions (including separate taxation of interest of an Indian permanent establishment of a foreign bank), and royalty and technical fees; it introduces significant economic presence tests for digital/user-based connections and leaves key thresholds and valuation mechanics to subordinate rules.