NUJS EABL February 2016 Batch Varun Raja

Assignment 2: What incomes are deemed to have

accrued or arise in India?
As per Section 9 in the Income Tax Act, 1995 (hereinafter, referred to as the
Act), the following incomes are 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, or through the transfer of
a capital asset situate in India. (Legislative Department, 2014)
This definition basically means that any income that is earned in India is deemed
to arise in India, this holds true for multinational companies that have operations
in India because the income earned from the India operations is deemed to arise
in India and therefore income tax is levied upon it.
Income tax is payable by a taxpayer, regardless of whether he is a resident
taxpayer, a non-resident taxpayer, or a non-resident Indian, on the total income
computed by an assessing officer under the provisions of the Act. Section 9 goes
on to specify certain types of income which is deemed to accrue or arise in India
under certain circumstances.

Non-Resident Indian (NRIs)

In the cases of Non-resident Indians for whom section 9 would have a more
relevant and prominent significance, the Act clearly defines an NRI. The act also
has clear guidelines as to what constitutes Income deemed to arise in India and
is therefore taxable. It also clearly lists out which activities are exempt from this
definition, which are:
1) Operations confined to the export of goods
2) News generated in India for the purpose of transmission outside India
3) Revenue generated from the activity of shooting films in India

Business Connection
As we covered in the definition above, the Act goes on to further explain what a
business connection is:
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, (Legislative Department, 2014).
The Act then goes on to list out the activities carried on behalf of a NRI that come
under the purview of this definition:

(a) An authority to conclude contracts on behalf of the non-resident

(b) Habitually maintains in India a stock of goods or merchandise from which he
regularly delivers goods or merchandise on behalf of the non-resident
(c) Habitually secures orders in India, mainly or wholly for the non-resident
A number of Judicial pronouncements have attempted to define and interpret the
term business connection with respect to guidelines as prescribed in the Act. One
of the more landmark cases is that of CIT v R.D. Aggarwal & Co. which shall
be discussed below.
R.D. Aggarwal and Company are a registered firm located at Amritsar. They
business activities were mainly in the form of imports and as commission agents
of non-resident exporters. In this case, the relevant exporters are Comptoirs
Lainiers Osterieth s.a. Anvers (from Belgium) and Filature Tessitura Di Tollengno
Biella ( from Italy). These two exporters dealt in the manufacture and export of
worsted woollen yarn of which R.D. Aggarwal and Company used to examine and
communicate orders to the exporters. This resulted in a contract whereby the
price for the goods is paid by the importer (R.D. Aggarwal) to the exporter. From
each deal, the importers were entitled to a commission varying between 1 and
2 % of the price. Further to this, the exporters had in a letter, appointed R.D.
Aggarwal & Co., the sole agents for the sale of their woollen yarn and also as
their representative for the whole of India. The assessing tax officer for the
related assessment year had then included 5% of the total yarn sold by the
exporters as part of the total income earned by R.D. Aggarwal & Co., this was
due to the fact that the officer believed that a suitable business connection
existed between the non-resident exporters and the India based importers. (Law
Teacher, 2013).
The opinion of the High Court, which then ruled that the relationship between the
assesse (R.D. Aggarwal & Co.) and the non-resident did not fall within the
meaning of the expression business connection. After which the Income Tax
Appellate tribunal appealed the verdict to the Supreme Court. The court then
proceeded to interpret the term discussing important characteristics drawn from
other cases that it believed would fall under the term business connection.
These characteristics are listed below:

Element of Continuity

Real and intimate connection

Mere purchase abroad and use in India is not continuing business

Element of Continuity
While discussing the meaning of the term business connection the court
contended that the term held something more than just business as defined in
the Act. It specifically said that:
A business connectioninvolves a relation between a business carried on by a
non-resident which yields profits or gains and some activity in the taxable
territories which contributes directly or indirectly to the earning of those profits

or gains. It predicates an element of continuity between the business of the nonresident and the activity in the taxable territories a stray or isolated transaction
is normally not to be regarded as a business connection. (Law Teacher, 2013)
In the case CIT v. Fried Krupp Industries, it was held that an isolated transaction
between a foreigner and a resident in India without any course of dealings such
as might fairly be described as business connection does not attract section 9.
There is no question of continuing business relating when a person purchases
machinery or other goods abroad or uses them in India and earns profit. (Law
Teacher, 2013)
It can be understood that where there is connection, or a continuity in business
relationship between the person in India who helps generate profits and the
person outside India who realizes the profit, such a relationship would constitute
a business connection. However, this must be determined on a case to case
basis.

Real and Intimate Connection

The Court held that for a relationship to fall under the definition of business
connection, it must be real and intimate. It further drew a distinction between
income arising from a business connection from a non-taxable territory as
opposed to income arising from within a taxable territory. The following words
were used by the court:
Income received or deemed to be received, or accruing or arising or deemed to
be accruing or arising within the taxable territories in the previous year is taxable
by S. 4(1)(a) & (c) of the (1922) Act, whether the person earning is a resident or
non-resident. If the agent of a non-resident receives that income or is entitled to
receive that income, it may be taxed in the hands of the agent by the machinery
provision enacted in S.40(2) (of the 1922 Act). Income not taxable under S.4 of
the Act of a non-resident becomes taxable under S.42(1)(of the 1922 Act)
[corresponding to S.9 of the 1961 Act] if there subsists a connection between the
activity in the taxable territories and the business of the non-resident, and if
through or from that connection income directly or indirectly arises. (Law
Teacher , 2013).

Mere purchase abroad and use in India is not continuing

business
The Court noted that if an entity or individual simply purchased goods from a
foreigner without any further services, for the explicit commercial use in India by
the individual, then the individual or entity is deemed to be earning its own
income.
The Supreme court referred to and expressed approval of the decision handed
down by the Bombay High Court in CIT v. Tata Chemicals Limited whereby it
held that in order for the non-residents income to be included as the residents,

under the current provisions of the Act, the department must prove that some of
the operations were carried out in India with respect to the income sought or
assessed. It also said that the term business connection implies that there is
continuity in the relationship, however no such question of continuity arises
when an individual simply purchases goods or machinery from an entity outside
India and earns profits while doing so. It was therefore held that in respect of
principal to principal transactions, no business connection can be said to arise.
(Law Teacher , 2013).
The judicial pronouncement from the case of CIT v R.D. Aggarwal & Co
brought in for the first time, the concept of Permanent Establishment into the
definition of the term business connection. This has brought into consideration
the following question for agents conducting business in India for people abroad:
- whether he is a dependent or independent agent. If he considers himself as a
dependent one, then he will automatically fall under the definition of the term
business connection. If, however, the agent considers himself independent, the
assessing authorities will have to examine whether his activities fall under the
normal course of business or are an extension of the business activities of the
non-resident he represents (Law Teacher , 2013).

This covers the main points that arise when considering the question of what
incomes are deemed to accrue or arise in India. In particular, some clarity is
brought to the confusion surrounding the term buiness connection with the help
of the landmark case of CIT v R.D. Aggarwal & Co. However, it is noted that
there still exists a certain measure of ambiguity in the term and as stated by the
courts, judgements will have to be handed down and considered on a case to
case basis.

References
Law Teacher. (2013, November). Business Connection And Income Tax Act.
Retrieved from Law Teacher: http://www.lawteacher.net/free-lawessays/commercial-law/business-connection-and-income-tax-actcommercial-law-essay.php
Law Teacher. (2013, November). Section 9 Of Income Tax Act. Retrieved from
Lawteacher: http://www.lawteacher.net/free-law-essays/commerciallaw/section-9-of-income-tax-act-commercial-law-essay.php
Legislative Department. (2014). Section - 9, Income-tax Act, 1961-2014.
Retrieved from Income Tax India:
http://www.incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?
grp=act&cname=cmsid&cval=102120000000037188&opt=&isdlg=1