Understanding Section 9(1)(vii) of the Income Tax Act, 1961: Implications for Non-Resident Taxpayers

Section 9(1)(vii) of the Income Tax Act, 1961 is an important provision that deals with taxation of income that is deemed to accrue or arise in India, even if the income is earned by a non-resident. In this blog, we will take a closer look at this provision, its scope, and its implications for taxpayers.

Introduction

Section 9(1)(vii) of the Income Tax Act, 1961 states that any income that is deemed to accrue or arise in India, even if the income is earned by a non-resident, is subject to tax in India. This provision is important as it expands the scope of taxable income in India and brings non-resident taxpayers within its ambit.

Scope of Section 9(1)(vii):

Section 9(1)(vii) applies to income that is deemed to accrue or arise in India. The provision includes income from any business connection in India, whether or not the non-resident taxpayer has a residence or place of business in India. The provision also includes income from any property in India, whether or not the non-resident taxpayer has physical possession of the property.

The term ‘business connection’ is defined under Section 9(1)(i) of the Income Tax Act, 1961. It refers to any business activity that is carried out through a person who acts on behalf of the non-resident taxpayer in India. This could include activities such as soliciting orders, delivering goods, or providing services in India.

Non-resident taxpayers and Section 9(1)(vii):

Section 9(1)(vii) applies to non-resident taxpayers who earn income from a business connection in India or from any property in India. In such cases, the non-resident taxpayer is required to pay tax in India on the income earned. The tax is calculated at the applicable rate under the Income Tax Act, 1961.

Exceptions to Section 9(1)(vii):

There are some exceptions to Section 9(1)(vii) that may apply in certain cases. For example, income earned by a non-resident taxpayer from a business connection in India may not be subject to tax in India if the business connection is of a ‘preparatory or auxiliary character’. This means that the business connection must be of a subsidiary nature and must not contribute significantly to the profits earned by the non-resident taxpayer.

Case law on Section 9(1)(vii):

There have been several important cases that have dealt with the interpretation and application of Section 9(1)(vii):

1. Morgan Stanley: In the case of Morgan Stanley, the company had a permanent establishment in India through its affiliate company. The question before the court was whether the income earned by Morgan Stanley from its Indian operations could be taxed in India. The court held that the income earned by Morgan Stanley was taxable in India, as it constituted business income accruing or arising from a business connection in India.
2. E-Funds Corporation: In the case of E-Funds Corporation, the company provided back-office services to its clients outside India. The company had a liaison office in India, which carried out marketing and promotional activities. The question before the court was whether the income earned by the company was taxable in India. The court held that the income earned by the company was taxable in India, as it constituted income arising from a business connection in India.
3. Formula One World Championship Ltd.: In the case of Formula One World Championship Ltd., the company entered into a contract with an Indian company for the grant of broadcasting rights. The company argued that the income earned was not taxable in India, as the contract was executed outside India. The court held that the income earned by the company was taxable in India, as the broadcasting rights were being utilized in India.

It is also important to note that non-resident taxpayers are required to file tax returns in India if they earn any income that is deemed to accrue or arise in India under Section 9(1)(vii) of the Income Tax Act, 1961. Failure to file tax returns and pay taxes can lead to penalties and interest charges.

In addition, the tax treaties that India has signed with other countries may have an impact on the applicability of Section 9(1)(vii) to non-resident taxpayers. Tax treaties generally provide for a mechanism to avoid double taxation, whereby the taxpayer can claim a credit for taxes paid in the foreign country against the tax liability in India.

Conclusion

In conclusion, Section 9(1)(vii) of the Income Tax Act, 1961 is an important provision that expands the scope of taxable income in India. Non-resident taxpayers who earn income from a business connection in India or from any property in India are required to pay tax in India on the income earned. It is important for taxpayers to comply with the provisions of Section 9(1)(vii) and to seek professional advice to ensure that they comply with the tax laws in India. The exceptions to the provision and the case law related to it provide important guidance on the interpretation and application of the provision.

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Frequently Asked Questions (FAQs)

1. What does Section 9(1)(vii) of the Income Tax Act, 1961 cover?

• Section 9(1)(vii) covers income that accrues or arises to a non-resident taxpayer from any business connection in India, or from any property in India.

2. Who is considered a non-resident taxpayer for the purposes of Section 9(1)(vii)?

• A non-resident taxpayer is an individual or entity that is not a resident of India for tax purposes.

3. What is a business connection under Section 9(1)(vii)?

• A business connection can be any type of connection or relationship that a non-resident taxpayer has with India, which results in the earning of income.

4. What types of income are covered under Section 9(1)(vii)?

• Any income that accrues or arises to a non-resident taxpayer from a business connection in India, or from any property in India, is covered under Section 9(1)(vii).

5. Are there any exceptions to the provisions of Section 9(1)(vii)?

• Yes, there are certain exceptions, such as income earned from a specified service provided outside India, or income earned from the operation of a ship or aircraft outside India.

6. How is the tax liability calculated under Section 9(1)(vii)?

• The tax liability is calculated based on the income earned by the non-resident taxpayer from the business connection in India or from any property in India, after deducting any allowable expenses.

7. Do non-resident taxpayers have to file tax returns in India under Section 9(1)(vii)?

• Yes, non-resident taxpayers are required to file tax returns in India if they earn any income that is deemed to accrue or arise in India under Section 9(1)(vii).

8. What are the penalties for non-compliance with the provisions of Section 9(1)(vii)?

• Non-compliance with the provisions of Section 9(1)(vii) can lead to penalties and interest charges, as well as prosecution under the Income Tax Act.

9. How do tax treaties impact the applicability of Section 9(1)(vii)?

• Tax treaties provide for a mechanism to avoid double taxation, whereby the taxpayer can claim a credit for taxes paid in the foreign country against the tax liability in India.

10. Can a non-resident taxpayer seek professional advice to ensure compliance with Section 9(1)(vii)?

• Yes, it is recommended that non-resident taxpayers seek professional advice to ensure that they comply with the tax laws in India, including the provisions of Section 9(1)(vii).