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International Taxation: Source Rule of Taxation under section 9.

International Taxation: Source Rule of Taxation under section 9.

Dear CA / CMA Students,

Let us start with few practical scenarios

  1. Mr. Mohan, non-resident owns house property in Mumbai. The same was given on rent for the period of 5 months to Mr. Kishore, another non-resident. Since both are neighbors at Australia, it was agreed that rent shall be paid in Australia. Discuss taxability of rent income in the hands of Mr. Mohan.
  2. Continuing above problem, Mr. Kishore would like to buy the property and it was agreed that the consideration was paid to Mr. Mohan in Australia. Discuss taxability of capital gain in the hands of Mr. Mohan, if any
  3. Mr. K. Bush (not a citizen of India), an employee of Microsoft (US) has been transferred to Bangalore Office to look after the operations of Microsoft (India) on 01-01-2021. His monthly salary is US $ 2000. His salary was continued to be deposited with State Bank of America, Old jersey branch. Discuss taxability of Salary Income in the hands of Mr K Bush.
  4. Mr. Rohan, a resident borrowed US $ 1,00,000 @ 6% p.a. from Jackson, a non-resident. Discuss tax consequences in the hands of Mr. Jackson assuming that Mr. Rohan used borrowed funds for the purpose of construction of factory at Chennai.
  5. Mr. Rohan, a resident borrowed US $ 1,00,000 @ 6% p.a. from Jackson, a non-resident. Discuss tax consequences in the hands of Mr. Jackson assuming that Mr. Robert used borrowed funds for the purpose of construction of factory at Bangalore.

Section 9 of the Income Tax Act

Section 9 of the Income Tax Act is a deeming fiction. This section provides that in certain situations, the income is deemed to accrue or arise in India despite fact that the actual place of accrual is outside India. The very intention to introduce deeming fiction under Income Tax Act was to tax certain incomes in the hands of Non-resident because source of such incomes was undisputedly in India. At present Section 9 (1) deals with following incomes

  • Business connection
  • House Property or other source
  • Capital Gain
  • Salary
  • Salary paid by the Government to a Citizen of India
  • Dividend paid
  • Interest
  • Royalty
  • Fees for technical services

Analysis and Conclusion for first two practical scenarios

The relevant limb of Section 9(1)(i) for the Practical 1,provides that income through or from any property, any asset or source of income in India shall be deemed to accrue or arise in India. This part of section 9 clarifies that income from any property or source which is located in India is alwaysdeemed to accrue or arise in India and therefore falls within the scope of total income under section 5 of the Act giving rise to taxability in India irrespective of residential status and place of receipt.

In the first practical, Mr. Mohan is earning rental income from property located in India and therefore, same is taxable in India by virtue of section 9(1)(i) eventhough it is received outside India.

Another limb of the Section 9(1)(i) also provides that Income through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. This limb is relevant for deciding taxability under Practical 2. This part of section 9 provides that capital gain is deemed to accrue arise in India if it is arising from transfer of capital asset situated in India and therefore falls within the scope of total income under section 5 of the Act giving rise to taxability in India irrespective of residential status and place of receipt.

In the second practical, Mr. Mohan is earning capital gain on transfer of property located in India and therefore, same is taxable in India by virtue of section 9(1)(i) eventhough it is realized outside India.

Therefore, the basic understanding student shall develop that if source of income is in India and it meets the requirement of section 9, then such income is always taxable in India eventhough

  • Place of accrual is outside India
  • Actual receipt is outside India and

Watch Video explanation at: https://youtu.be/LTrJyCEqPTw

You can also listen me for the rest of practical scenarios and more at https://www.youtube.com/channel/UCbmK3daYbl-6unKnzthWFLQ

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Happy Learning J 🙂

All the best.

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