Section 9

Section 9 — the law in short

What the courts have decided on section 9, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Hyatt International Southwest Asia Ltd v Addl DIT Supreme CourtHelps department
  We run an Indian hotel under a long management agreement but own no office here. Can the department say we have a permanent establishment?
  Yes, on facts like these. A twenty-year agreement under which the foreign company appointed and supervised the general manager, set human resource and procurement policy, controlled pricing and marketing, and operated the hotel's bank accounts, performed through its own staff working from the hotel, made the hotel premises a fixed place of business under Article 5(1) of the India-UAE treaty. Exclusive or designated space is not required; what is required is that the premises be at the enterprise's disposal and that its business be carried on through them.
• DIT v Travelport Inc. Supreme CourtHelps taxpayer
  The Assessing Officer has found a permanent establishment and wants to tax my client's entire Indian booking revenue. My client already pays its Indian distributor a commission larger than anything that could be attributed to India. Is there anything left to tax?
  No, where the commission already paid to the Indian agent exceeds the profit attributable to the Indian operations, the assessment is extinguished. The Supreme Court upheld the Tribunal's attribution of 15 per cent of the revenue to India on a functions, assets and risks analysis and held that, because the distribution commission was more than twice that figure and had already been taxed, no further income was taxable in India — and it declined to decide whether there was a permanent establishment at all, because the attribution answer disposed of the appeals.
• Sedco Forex International Inc v CIT Supreme CourtHelps department
  We are a non-resident drilling contractor taxed under section 44BB. Is the mobilisation fee for bringing the rig to India part of the taxable receipts?
  Yes, on these contracts. The Supreme Court held that a fixed mobilisation fee paid for moving a drilling unit to the Indian location falls within clause (a) of section 44BB(2), as an amount paid on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used in, the extraction of mineral oils in India. Clause (a) applies whether the amount is paid in or outside India. By the fiction in section 44BB the amount becomes income under section 5 and is treated as arising in India for section 9. The assessees' appeals were dismissed.
• ADIT v E-Funds IT Solution Inc Supreme CourtHelps taxpayer
  We outsource back-office work to our Indian subsidiary. Does that give us a permanent establishment in India?
  No, not by itself. The Revenue must prove that a fixed place in India was at the disposal of the foreign company and that the foreign company carried on its own business through it. Close association between parent and subsidiary, and the fact that the Indian company depends on the group for its work, do not answer that question, and the functions-assets-risks analysis borrowed from transfer pricing is not the test for whether a fixed place permanent establishment exists.
• Formula One World Championship Ltd v CIT Supreme CourtHelps department
  We had access to an Indian venue for only a few days in the year. Can that be a permanent establishment?
  Yes. A place is at the disposal of an enterprise when the enterprise has the right to use it and control over it, and a fixed place permanent establishment needs stability, productivity and dependence rather than ownership or a long lease. The Buddh International Circuit was a fixed place through which Formula One World Championship Ltd carried on its commercial activity, so it had a permanent establishment in India.
• GE India Technology Centre P Ltd v CIT Supreme CourtHelps taxpayer
  Must you deduct tax on every payment to a non-resident, just to be safe?
  No. The obligation under s.195 arises only where the sum paid is chargeable to tax under the Act. Mere remittance to a non-resident does not attract it, and you need not apply under s.195(2) where nothing is chargeable.
• Ishikawajima-Harima Heavy Industries Ltd v DIT Supreme CourtHelps taxpayerSuperseded by amendment
  Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
  No — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side.
• CIT v Nokia Network OY High CourtHelps taxpayerNo later treatment found
  We supply telecom equipment with embedded software to Indian operators through our Indian subsidiary. Is the subsidiary our permanent establishment?
  No on the permanent establishment question; the software question was never decided. A wholly-owned Indian subsidiary is a separate legal entity, and Article 5(8) of the India-Finland treaty forbids treating it as a permanent establishment merely because it is a subsidiary: the enquiry is factual, governed by disposal and virtual projection, and on these facts the Revenue produced nothing to establish either a fixed place or a dependent agent permanent establishment. The Court did not hold that bundled software is part of a sale of goods rather than a licence. That question was conceded in the assessee's favour in the light of the Supreme Court's decision in Engineering Analysis Centre of Excellence, so this judgment is not authority on it; nor did the Court decide the taxability of offshore supplies as a separate question, treating that as settled by Ishikawajma-Harima.
• CIT (International Taxation)-3 v Bank of Tokyo-Mitsubishi UFJ Ltd High CourtHelps taxpayerNo later treatment found
  Our Indian branch earned interest on balances kept with the head office and overseas branches. Is that taxable in India?
  No, on the years before the 2015 amendment. A branch is not a separate legal personality, and one cannot make a profit out of oneself, so interest received by the Indian permanent establishment from its own head office or overseas branches is not chargeable to tax in India. The Explanation to s.9(1)(v), which deems a banking permanent establishment to be a separate and independent person, took effect only from 1 April 2016 and had no application.
• Blackstone Capital Partners Singapore VI v ACIT High CourtHelps taxpayerUnder appeal
  I hold a valid TRC. Can the AO go behind it and reopen my assessment for lack of substance?
  No. A valid tax residency certificate is statutorily the only evidence required to be eligible for treaty benefit, and the Indian authorities cannot disregard a certificate issued by another State's tax authority. Since Article 13(4) of the India-Singapore treaty then protected the capital gains, no income chargeable to tax had escaped assessment and the s.148 notice was invalidated.
• GE Energy Parts Inc v CIT High CourtHelps department
  Our Indian group company only markets and supports. Can the department call it our dependent agent PE?
  Yes, on these facts. Where the personnel working out of the Indian premises do more than liaise — where they take part in technical and financial negotiation and in price negotiation with the customer — the Tribunal's finding of both a fixed place permanent establishment and a dependent agent permanent establishment stands. The Delhi High Court affirmed the Tribunal and dismissed the appeals.
• Sumana Bandyopadhyay v DDIT High CourtHelps taxpayer
  The AO taxed my foreign salary because it landed in my Indian NRE account. Can he do that if I am a non-resident?
  No. Salary that became due and accrued to a non-resident for services rendered outside India does not become chargeable on a receipt basis merely because the foreign employer paid it into an Indian NRE account. Income accrues where the services are rendered, not where the money is banked, and the High Court allowed the appeal and answered the question in the assessee's favour.
• Nortel Networks India International Inc v DIT High CourtHelps taxpayer
  The Assessing Officer says my Indian subsidiary is my alter ego, so the whole turnkey contract is taxable here. Does an alter-ego finding by itself make offshore supply income taxable in India?
  No. The Delhi High Court held that even if the assessee were treated as an alter ego of the group, no part of the consideration for equipment manufactured and delivered outside India was chargeable in India. Clause (a) of Explanation 1 to section 9(1)(i) embodies a principle of apportionment, so only income reasonably attributable to operations carried out in India is taxable, and the equipment passed to the buyer abroad on FCA terms. There was no material that the Indian entity habitually concluded contracts for the assessee or held stock for delivery on its behalf, so the dependent agent Explanations were not satisfied. The appeals were allowed.
• Van Oord ACZ India P Ltd v CIT High CourtHelps taxpayerPartly overruled — read this first
  The remittance to my foreign parent bore no tax. Can s.40(a)(i) still hit me for non-deduction?
  No. Section 195(1) fastens the duty to deduct on a sum chargeable under the Act, so chargeability is a jurisdictional condition and not a question of quantum. Where the authorities have found in the non-resident's own assessment that no tax is payable, there is nothing to deduct and no disallowance can follow.
• eBay International AG v ADIT ITATHelps taxpayer
  We charge Indian sellers a fee for listing on our overseas marketplace. Is that fees for technical services, and do our Indian support companies make us taxable here?
  No on both, and note how the second answer is reached. Providing a platform on which others transact is not the rendering of managerial, technical or consultancy services, so the user fees are not fees for technical services. On the treaty the Tribunal accepted that the Indian group companies, working exclusively for the Swiss company, were dependent agents - the assessee lost that limb - but held that a dependent agent becomes a permanent establishment only if it performs one of the functions listed in Article 5(5), and marketing and collection work is not among them. They were not a place of management either. Without a permanent establishment the business profits article keeps the income out of the Indian charge.
• Statutory position — s.9(1)(i) Explanation 2A: significant economic presence, the Rule 11UD thresholds of two crore rupees and three lakh users, its commencement from AY 2022-23, and why it does not by itself create a treaty permanent establishment CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says my non-resident client has a significant economic presence in India and therefore a business connection. From which year does that provision actually operate, what are the thresholds, and does it override the treaty?
  Significant economic presence is a DOMESTIC-LAW expansion of 'business connection' in section 9(1)(i) of the Income-tax Act. It has nothing to do with the equalisation levy, which is charged by Chapter VIII of the Finance Act, 2016 and is not in the Income-tax Act at all. Explanation 2A in its present form was inserted by the Finance Act 2020 with effect from 1 April 2022, and it has two limbs: (a) transactions in goods, services or property with any person in India, including provision of download of data or software in India, where the aggregate of payments in the previous year exceeds a prescribed amount; and (b) systematic and continuous soliciting of business activities, or engaging in interaction, with a prescribed number of users in India. Rule 11UD prescribes both: TWO CRORE RUPEES and THREE LAKH USERS. Rule 11UD was inserted by the Income-tax (Thirteenth Amendment) Rules, 2021 with effect from 1 April 2022. And Explanation 2A does not by itself create a permanent establishment: it enlarges a domestic deeming provision, it does not amend any treaty, and where a treaty applies, section 90(2) allows the assessee the more beneficial position, so business profits remain taxable only if there is a permanent establishment as the treaty's own Article 5 defines it.
• Statutory position — the significant economic presence timeline: the earlier Explanation 2A, the assessment year in which there was none at all, and Explanation 3A on targeted advertising and data from 1 April 2021 CBDT Circulars & InstructionsCuts both ways
  The notice invokes significant economic presence for an assessment year before 2022-23. Was there any such provision in force then, and what else did the Finance Act 2020 do to section 9(1)(i) for the digital economy?
  The equalisation levy is charged by Chapter VIII of the Finance Act, 2016 and is not in the Income-tax Act; significant economic presence is the Income-tax Act's separate answer to the same problem, and its history is untidy in a way that matters. An earlier Explanation 2A was inserted into section 9(1)(i) by section 4 of the Finance Act, 2018 with effect from 1 April 2019. Section 5 of the Finance Act, 2020 then did three things: it OMITTED that Explanation with effect from 1 April 2021, inserted the present Explanation 2A with effect from 1 April 2022, and inserted a new Explanation 3A with effect from 1 April 2021. The consequence is that for assessment year 2021-22 there was no Explanation 2A on the statute book at all. Explanation 3A is the provision that survives that gap: from 1 April 2021 the income attributable to operations carried out in India under Explanation 1 'shall include' income from advertisement targeting an Indian-resident customer or a customer accessing it through an Indian internet protocol address, from sale of data collected from such a person, and from sale of goods or services using such data.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.