Income deemed to be accrue

or arise in India
 Income which are deemed to Accrue or Arise in India

• Income through or from business connection in India is deemed to Accrue or

Arise in India 9(1)(i)
From the assessment year 2004-05, it
Explanation 2 to Section 9(1) (i)
has been clarified that the term business connection will
include to the following: 
(a) Business activity through a person having an authority to
conclude contracts on behalf of the non resident provided
he/it habitually exercise such authority [ Exp 2(a) to Sec.9(1)].
(b) Business activities through a person who have habitually
maintain stock of goods on behalf of the non-resident from
which he regularly delivers good and  merchandise on behalf of
the non-resident without having any authority [Expl. 2(b) to Sec.
9(1)].
(c) Business activities through a person who habitually secures
order mainly or wholly for the non-resident or/ and other non-
resident entities controlling controlled by or under the same
control of the same non-resident person [Exp.2(c) to Sec 9(1)].
• Exceptions [Proviso to Sec 9(1)]: Business connection will
exclude any business activity through brokers are commission
agents of independent status acting in ordinary course of their
business [First proviso to Exp. 2 to Sec.9(1)].
• However where search broker or commission agent works
mainly on behalf of the non resident or and other non-resident
entities controlling controlled by or under the same control as
the non-resident, such brokers or agent will not be considered
as having an independent status.
• Lubrizol Corporation USA v. ADIT(2013) 60 SOT 118(URO)
(Mum)(Trib)
- Where Indian subsidiary only assisted in sale of products in
India and did not have any authority to negotiate terms of sales
or conclude contract on behalf of foreign assessee company, it
could not be considered as agency Permanent Establishment in
India and therefore no profit could be taxed in India.
Amendment made by Finance Act, 2018, w.e.f
A.Y. 2019-20
1. Business connection to include any activity
carried out through a dependent
agent[ Explanation 2 to section 9(1)(i)]
- Aligning the scope of “Business connection
with modified Permanent Establishment Rule
2. Significant Economic presence
Explanation 2A under section 9(1) (i)
Business connection shall include “Significant
Economic presence” also
• “Dependent Agent Permanent Establishment” DAPE
• Reasons for amendment
• Under the existing provisions of clause (a) of Explanation 2 to section 9 (1)(i), “ business
connection” includes business activities carried on by non-resident through dependent
agents. The scope of business connection under the Act is similar to the provisions
relating to Dependent Agent Permanent Establishment DAPE in India’s Double Taxation
Avoidance Agreements DTAAs in terms of the DAPE rules in tax treaties, if any person
acting on behalf of the non-resident is habitually authorised to conclude contracts for
the non-resident, then such agent would constitute a PE in the source country.
• However, in many cases, with a view to avoid establishing a
permanent establishment(PE) under Article 5(5) of the DTAA, the
person acting on the behalf of the non-resident, negotiates the
contract but does not conclude the contract.
• BEPS action plan 7 recommended modification to paragraph 5 of
Article 5 to provide that an agent would include not only a person
who have actually concludes contract on behalf of the non-
resident, but also a person who habitually plays a principal role
leading to the conclusion of contracts.
• BEPS Action Plan 7 have now been included in Article 12 of
Multilateral Convention to Implement Tax Treaty Related Measures
(here in referred as ‘MLI’), to which India is also a signatory
• Amendment in Explanation 2 to section 9(1)(i) relating to DAPE
• In view of the above, the Act has amended the provision of section 9 of the act so as to align
them with the provisions in the DTAA as modified by MLI so as to make the provisions in the
treaty effective.
• Accordingly, clause (a) of Explanation 2 to section 9(1)(i) has been substituted by a new
clause (a) to provide that business connection shall include any business activities carried
through a person who, acting on behalf of the non-resident—
• - has and habitually exercises in India, and authority to conclude contracts on behalf of the
non-resident or
• -habitually concludes contract or
• -habitually place 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.
• “Significant Economic presence”
• The Finance Act, 2018 has inserted Explanation 2 A under
section 9(1)(i), w.e.f. 2019-20. According to Explanation 2A,
Business connection shall include “ Significant Economic
presence”.
• Reasons for making amendment relating to “Significant
Economic presence”
• BEPS Action plan1 – Taxation of digital taxation
• 2016- Equalisation of levy
• Significant economic presence 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 the 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 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.
• A new Explanation 3A has been added to section 9(1)(i) so as to provide that the
income attributable to operations carried out in India, as referred to in Explanation 1 to
section 9(1)(i) shall include income from:
• such advertisement which targets a customer who resides in India or a customer who
accesses the advertisement through internet protocol address located in India;
• sale of data collected from a person who resides in India or from a person who uses
internet protocol address located in India; and
• sale of goods and services using data collected from a person who resides in India or
from a person who uses internet protocol address located in India.
• Explanation 3A – added by Union budget 2020-21
CIT v. Hindustan Shipyard Ltd .(1977) 109 ITR 158 AP

A foreign company non resident in India sell diesel engine with accessories to an Indian company. The
engines were agreed to be erected by the staff of the purchaser under the supervision of an engineer of
the foreign company. The agreement also provided overseas training course for some technical
employees of the purchaser. There will be no business connection in such case as the non resident
company merely agree to render certain limited services connected with the effective fulfilment of the
contract of sale. Such services as are merely incidental to the contract and are usually included in all
such contracts by way of guarantee of the efficient working of the product sold. To confirm with the
requirement of the expression business connection it is necessary that the common thread of mutual
interest beyond a contract of sale must run through the fabric of the trading activities. 
• Kanchanganga Sea Foods Ltd. v. CIT (2010) 192 Taxman 187 (SC)
Assessee company was engaged in sale and export of seafood and for that purpose it
obtained permit to fish in exclusive economic zone of India. To exploit fishing rights, it
entered into an agreement, chartering two fishing vessels with a non-resident
company. Charter fees was payable from earnings from sales of fish and for that
purpose 85% of gross earning from sale of fish was to be paid to non-resident
company. Actual fishing operations were done outside territorial waters of India but
with in exclusive economic zone. Thereafter chartered vessels with entire catch were
brought to Indian port, catch were certified for human consumption valued and after
customs and port clearances non resident company received 85 % of catch . It was held
at non resident company effectively received charter fees in India and same would be
chargeable to tax under section 5 (2). Assessee was liable to deduct tax under section
195 on payment made to non resident company because income of non-resident
company is deemed to be accrue or arise in India through business connection in
India. 
• Star Cruise Management Ltd. v. DCIT(2013) 58 SOT 3
(URO)Mum.(Trib)
- Assessee  company was receiving the remittance of ticket sold
by the Indian company outside India it was held  assessee was
not having any business connection in India within the meaning
of section 9(1)(i) of the Act. Hence no income has been accrued
to the assessee in India in respect of booking on sale of tickets
for tour packages of the cruise in India which was done through
Star Cruises (India) Travel services Pvt. Ltd.
• In the case of Mustaq Ahmed, In re(2008) a non-resident was
getting gold jewellery manufactured in India, but selling it
abroad with sale proceeds received in India in the non-
resident’s bank account in India, the income is taxable both on
accrual and receipt basis in India.
• In the case of Satellite Television Asian Region v DCIT(2006) Mumbai tribunal was
dealing with the case of an assessee, a non-resident company incorporated in Hong
Kong, selling television 'air ad time ' to various Indian advertisers through its
advertising sales agent(namely, Star India Private Limited, an Indian company), 
wherein the assessee acquired the air ad time meant for advertisement from various
television channel companies who were also non-resident; it was held that there exist
a business connection between the assessee and the television channel companies as
the assessee was acting as a functional agent of the television channel companies.
Although the assessee contended that the contract is between the assessee and the
television channel companies were principal -to -principal in nature, the tribunal held
that since the assessee and the television companies were ultimately controlled by a
mother holding company, the functions carried out by all the companies were there for
towards the commonness of interest involving in Carrying out this business activity
hence the proposition of principle to principal relationship is almost irrelevant and
theoretical in nature. Therefore the income earned by the television companies was
treated as taxable in India since the television channel companies had a business
connection in India.